Quarterly Property Market Outlook - Q1 2024

The Australian property market finished 2023 with a national increase of 8.1%, recovering from the -4.9% decline observed in 2022. The fourth quarter witnessed a 1.5% rise in property prices, continuing the growth trajectory from the third quarter's 2.3% increase. Nationally, rents were up 8.3% in 2023, as the rental market continues to tighten given ongoing population growth via immigration, which is expected to far exceed the construction of new homes over the next year.

CoreLogic, Monthly Housing Chart Pack, January 2024

Contrary to some analysts' projections of a modest downturn, Australian property prices rallied in 2023, overcoming challenges posed by persistent rate hikes and economic uncertainties fuelled by inflation, which remains significantly above the Reserve Bank of Australia's target range of 2-3%. Factors such as record-high net overseas migration, limited housing inventory available for sale, and a general housing shortage exerted upward pressure on prices, counterbalancing the adverse effects of last year's interest rate increases.

Looking ahead to 2024, inflation and consequent high interest rates pose a primary risk to the property market. However, there was a notable improvement in inflation expectations in the fourth quarter of 2023, with a decrease in inflation from a peak of 8.4% in December 2022 to 4.3% in November 2023, and further reductions are anticipated. Bond markets suggest that interest rates may have reached their peak, forecasting two rate cuts (0.50%) over the course of 2024. This anticipated reduction in rates could improve household disposable income and enhance banks' capacity to extend larger loans for property purchases. Nevertheless, risks persist if inflation does not continue its downward trend and interest rates remain elevated at around 4.35%, potentially impacting house prices.

While the property market faces risks related to interest rates, mitigating factors exist including record levels of net overseas migration, a growing shortage in housing supply leading to tight rental markets, and constraints in the housing construction sector. In 2023, Australia experienced a record population increase of 624,000, while only 174,000 dwellings were constructed. This supply-demand imbalance has supported property prices throughout the year and resulted in historically low national rental vacancy rates of 1.1%. With new housing approvals at a decade low and trending lower, a shortage of newly built homes in the short to medium term seems likely. These elements are sustaining house prices, balancing the negative impacts of the recent significant rise in interest rates.

The property markets are subject to various, sometimes contradictory, forces. Nonetheless, as inflation eases and interest rate reductions become more likely, the principal downside risk to the housing market appears to be diminishing. Analysts anticipate a moderate 5.0% increase in property prices for 2024, reflecting the interplay of high interest rates and reduced household disposable income against the backdrop of robust population growth and limited construction activity. Despite this modestly improving outlook, significant uncertainty remains in the property market and the broader economic environment. Consequently, it is important for real estate debt funds to maintain conservative lending standards and proactive management of its existing portfolio.