The Australian Property Market 2023 Update: Brace Yourself for a Correction

As reported in The Australian and the AFR the Australia’s property market is expected to experience a significant correction in 2023.

Recent reports by PropTrack and Jarden Investment Bank have highlighted that increased interest rates and reduced borrowing capacity will cause prices to drop by 10-25 percent, with the more expensive cities likely to see the largest price falls.

TLDR:

• Property prices in Australia’s largest cities are expected to fall 10-25% in 2023
• The cause of the correction is the rising interest rates and reduced borrowing capacity
• The most expensive cities, including Sydney and Melbourne, are expected to experience the biggest falls
• The correction is due to the Reserve Bank’s efforts to combat inflation

In the Grip of A Correction

The Australian property market, which saw a 40 percent increase in prices during the pandemic boom, is now expected to correct between 10-25 percent in 2023.

According to PropTrack’s Property Market Outlook, buyer and seller activity has declined as a result of rising interest rates and reduced borrowing capacity. The east coast, with the country’s most expensive cities, including Sydney, Melbourne, and Brisbane, is expected to experience the biggest price falls between 8-11 percent.

With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls

PropTrack, Cameron Kusher

Jarden Investment Bank also downgraded its housing outlook and warned that prices could drop by 20-25 percent. The Reserve Bank is expected to hike rates to combat inflation, which would reduce borrowers’ capacity to buy a home. This will cause the average mortgage rate to exceed 6 percent in coming months and result in a cumulative fall of more than 30 percent.

“Indeed, we now see too much downside risk to our long-held forecast of a 15-20 per cent peak-to-trough fall in house prices and downgrade to a 20-25 per cent correction,” wrote Jarden analysts Carlos Cacho and Anthony Malouf.

The Impact

The Reserve Bank’s efforts to combat inflation have caused interest rates to increase rapidly, resulting in a reduced borrowing capacity for home buyers. The interest rate hike from 0.1 percent to 3.1 percent in just eight months is the fastest tightening cycle in three decades. The Reserve Bank is lifted rates by a further 0.25 percent on Tuesday, which took the cash rate to 3.35%, its highest level since 2012.

PropTrack has factored in a 50-basis point increase in 2023, likely to be handed down in the first half of the year and followed by a period of rate stability. This would cause buyers’ borrowing capacity to fall about 30 percent from April 2022.

“The strong labour market, with unemployment the lowest it has been in decades and wage growth accelerating, may also support the housing market,” says Kusher.

The Correcting Housing Market

The correction in the property market will have a significant impact on the housing market. Analysis of listing activity on Realestate.com.au found that the time it takes for a property to sell has blown out from 10 days in December 2021 to 42 days at the end of last year. The correction is expected to drive national prices back down to 2020 levels, largely erasing the post-Covid boom.

“This is likely to see the average mortgage rate exceed 6 per cent in coming months and further reduce borrowing capacity, for a cumulative fall of more than 30 per cent,” wrote Jarden’s Cacho and Malouf.

Conclusion

The Australian property market has been through a tumultuous period over the past three years. The rapid rise of interest rates and the pandemic-driven slowdown have had a significant impact on the market, leading to declining property values and uncertain buyer sentiment. However, there are signs that the worst of the downturn may have passed and the market could be on the road to recovery. The trajectory of interest rates, tight rental markets, rebounding foreign migration, stronger wages growth, and housing supply pressures are all factors that are expected to play a role in supporting property prices in 2023.

While the market may still experience some softness in the first half of the year, the majority of interest rate hikes are expected to be over, and rate cuts could even be on the horizon. With investor activity likely to increase, particularly in the apartment market, the market could stabilize, leading to price growth and a return to buyer confidence.

While there is still some uncertainty surrounding the market, the outlook for 2023 is promising, and property experts believe that the worst of the downturn has passed. With the right investments and a strong economy, the Australian property market could see a return to growth and stability in the coming year.

Sources: The Australian, AFR.com