When the RBA first began hiking interest rates in May 2022, some economists predicted that even with a modest 1% rate increase, house prices would fall by up to 25%. If these predictions had materialised, they would have marked the largest drop in Australian house prices on record. From May 2022 until the end of 2022, prices across the housing market did soften, with some markets retracting by up to 10%. However, by the beginning of 2023, it became clear that prices were no longer falling and the market was in fact in the process of returning much of its earlier losses. This rebound has continued throughout the year, and since January, prices have risen by 6.6% nationally, leaving them just 1.3% below the previous peak.
In today’s article, I want to discuss why prices have remained strong despite rising interest rates and economic uncertainty.
Property prices are influenced by supply and demand, and in 2023, the supply side dried up. The declining prices of 2022, continued uncertainty around interest rates, and low confidence in achieving a strong sale price, meant vendors were hesitant to list their property. By the first quarter of 2023, the number of homes for sale was 18% lower than the same time one year prior. Many vendors were still benefiting from low multi-year fixed rates and had amassed significant savings buffers. This shielded them from the immediate impacts of increased interest rates. Consequently, many were happy to sit tight and wait to see how things unfolded. This decision ultimately looks to have been wise. The shortage of properties intensified competition and ensured bumper prices for what few properties were available.
At the same time that stock levels were decreasing, the relative demand from buyers was increasing. From my own conversations with clients, I know many of them were previously content with renting, but decided to bring forward their decision to buy. This decision was motivated largely by the increasing cost of renting as well as the difficulty in securing a rental property. Rents have risen by as much as 30% in some suburbs and vacancy rates are at record lows. Many of my clients were happy to pay the increased cost of ownership to lock in security of tenure.
Although the overall number of first home buyers dropped, they were again competing for a smaller number of available properties. Those who did enter the market took advantage of generous government concessions, which reduced the deposit required and eliminated Lender’s Mortgage Insurance (LMI). In fact, one third of all first time buyers purchased with the help of the first home guarantee scheme, allowing them to purchase with just a 5% deposit.
Furthermore, Australia has seen a significant population increase with 424,000 new migrants arriving in the year leading up to March 2023. Of course not all new arrivals are in the position to purchase right away, but many are. It only takes a small percentage of new arrivals looking to purchase, coupled with historically low stock levels, to create upwards pressure on prices.
Finally, supply chain disruptions and cost pressures have persisted in the construction industry. In 2022, the cost to build a new home rose by c10% and that is on track to rise a further 5% in 2023. Ultimately, these increased costs get passed on to the end purchaser. When new builds increase in price, this has a flow-on effect on the suburb median, meaning older less desirable properties can still see a significant price uplift.
Overall, I think all of the above goes to show the difficulty with trying to predict or time the market. Most banks and economists predicted significant price drops, yet by and large, they have proven to be incorrect. Those who relied on these predictions and expected price falls to continue, may now find themselves paying significantly more for the same property.
So when is the right time to buy? When your lifestyle demands it, when you can afford to, and when the bank will support your purchase. If you meet those three criteria and have a long term horizon, then history shows us that the Australian real estate market is likely to be very kind to you.
