min read
· Posted on
February 21, 2024

The Australian property market 2023: The plot twist nobody saw coming

We all thought 2023 would be the year we see house prices start to go down. But these pesky house prices are moving up instead.

What's the key learning?

  • In the last three months, Australian property prices have been rising.
  • This is unexpected because with rising interest rates, borrowing has become more expensive.
  • One reason is the increase in migration post-covid means housing demand is growing fast.
  • Another reason is that housing supply is slow due to labour and material shortages.

An increase in the value of property was certainly not on my bingo card for 2023.... but plot twist, house prices have been ramping up over the last couple of months. 

The property price sitch until now.

In the 10 months between May 2022 and February 2023, we saw the value of Australian houses drop by 9.1%. It makes sense - as interest rates go up, the cost of borrowing goes up and housing prices drop.

But over the last three months, Australian property prices have been climbing up the charts like an unanticipated pop hit – think Gangnam Style, but with less dancing and more frustration.

Nobody expected this…

Just last month, we saw Australian property prices jump up by 1.2%.

And in April and March by 0.6% and 0.5% respectively.

The largest growth has been in capital cities, with prices jumping the most in Sydney (1.8%), followed by Brisbane and Perth (1.4% and 1.3% respectively).

Now, here’s why this is weird.

The RBA has increased interest rates 12 times in the last 13 months with the hopes of discouraging spending and bringing down this pesky inflation.

As interest rates have gone up, borrowing has become more expensive.

Now, that should mean households with mortgages are spending less because their mortgage repayments are going up.

And households without mortgages are dissuaded from buying property…for now.

But instead we’re seeing properties selling for well above their listed price, and auction clearance rates above their long-run average.

The math just isn’t mathing.

So, why are we seeing property prices going up?

To quote our boy, RBA Governor Phillip Lowe when asked about how to take pressure off the housing market, it comes down to a lack of “supply, supply, supply.”

But that’s a major oversimplification of the issue.

Australia's housing market is like a busy nightclub right now - everyone wants in, but there's no room to dance. And there are a few key reasons for this:

  1. Australia’s having a surge of demand for housing as post-Covid migration is picking up strongly.

In fact, overseas migration is expected to be 400,000 people across 2022-2023, or 2% of the population, and 315,000 in 2023-2024.

To add some perspective, pre-pandemic migration average was at about 250,000 people per year.

Now these people need a roof over their head, but housing supply isn’t keeping up with the population growth at the moment.

  1. New apartment approvals fell to their lowest level in more than 11 years in April, partly because of material and labour shortages.

And as we know, when there’s high demand for something, but low supply, it becomes more valuable and more expensive.

Like when dumbbells were in short supply because everyone wanted to build a home gym during lockdowns.

The outcome? Property buyers are in full gladiator mode, fighting tooth and nail, and driving up prices.

That one bidder who comes to the auction like…

What does this mean for renters?

Rental prices have been exploding while vacancy rates are at record lows. Not a good mix.

Rent is the largest component of the CPI (consumer price index), meaning it has a HUGE impact on inflation.

And it’s part of the reason inflation isn’t going down as fast as we’d hoped.

Inflation has been coming down in some sectors of the economy, but the higher interest rates are pushing up rent prices which is actually upping inflation in other parts of the economy.

The RBA is expecting growth in rent to be around 10%, and rent inflation hasn’t been this high since 1989, AKA when Seinfeld first came out.

So here’s what’s probably going to happen next.

There’s going to be a time lag in the solution here because we can’t construct houses and increase supply overnight.

RBA Governor, Phillip Lowe reckons the only way out of this is through it.

He believes that in the short term, higher interest rates will help lower some rental pressure by forcing people to compromise on their housing.

And if interest rates do keep rising, we’ll probably see that happen.

Kids might decide not to move out of home because of how expensive rent is, renters might swap out their home-office for a housemate to manage their cost of living.

We’ll likely see the number of people in a household go up.

Realising I’ll probably have to live at home till I’m 40 at this rate

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