What’s Next for The Real Estate Market

This isn’t a simple question to answer and here is why. You have to consider some very important signs. The National Home Value Index (HVI) has been rising again and has seen some growth since Nov 2021. We’ve seen a rise by 1.2% in May 2023 and this is the third successive rise since a period of decline earlier this year. Seems to be some good news from an economic perspective considering the turbulence we’ve seen with interest rates.

However, NSW continues to lead the revival, with home values increasing by 1.8% over the month of May the biggest gain since September 2021 and we’re seeing an upward trend across the majority of states across Australia. In May, Melbourne saw a 0.9% increase May, Brisbane and Adelaide recorded a rises of 1.4% and 0.9% in Perth. These are positive indicators so why are we then concerned?

Well, the reasoning seems to be around the drops in values some by 9.7% over a period of ten months from earlier this year. This isn’t a record drop by any stretch, but it has been noted as a massive decline in a short amount of time. There have actually been some home values that have gone up since February, but they are by no means near the enormous rises we saw in April 2022. So, with this evidence it would suggest we are not really in a recovery mode just yet it would seem. Remarkably values are still higher than pre-pandemic if look at statistics from 2019-2020.

One of the decisive factors having an influence is of course the recent interest rate increases and the amount of them so consecutively. Some would say we are almost spooking the market unnecessarily. No doubt this is having a big impact on the sellers and buyers and we are going to see people affected as their mortgage repayments have risen with some even doubling. Borrowers and banks factor in rates rises make no mistake but with predictions not expecting rises in 2023 and now we see some only just recently coming off their fixed rates. The number of rate rises will impact everyone on a on some level and in particular those with a hefty mortgage so in some way no one can hide and then consumer confidence is impacted and remains low.

Rising inflation, rate rises, spending not to mention the cost of living have all impacted the market’s ability to recover. People are sceptical to move or sell or do anything to rock their financial boat so we go into a somewhat stasis phase. That said we’ve had these times many before and it’s best we look for the positives and there are some good signs. For example, recent rises in home values. We see that the selling conditions are improving, and more sellers could be expected to take advantage of this very unique market condition occurring. The further interest rate rises and the consumer sentiment will decide whether we see this further growth phase continue albeit moderately.

The Director of research at CoreLogic, Tim Lawless, noted at the release of the Home Value Index in May the following:

“A combination of net migration and a shortage of stock was likely contributing to the recovery in the housing market”.*

So with the figures and research evident last quarter the question could be raised have we now seen the bottom of the market?

Many agents we’ve spoken to have indicated that many sellers were sitting on the sidelines throughout the downturn and rightly so people were cautious as there were 12 rises in as little as 13 months.

This must have put significant doubt into the minds of both the purchasers and the vendors. But with a lack of stock availability in the market it has given sellers a lot of leverage with pricing. It’s also significant to understand that while properties are more reasonably priced now than during the pandemic, they are still well above pre-pandemic levels and remain quite solid.

Eliza Owen, Head of Research, Australia, at CoreLogic states:

“Australia’s housing market saw a recent peak in April 2022; at that point the market had risen by about 30%, we had a stronger upswing in regional Australia where values increased about 40% between late 2020 and early 2022, while in the combined capital cities, the upswing was about 25%.” *

Owen also says, “the boom was largely fuelled by the emergency low interest rates during the Covid-19 pandemic that slashed the cost of borrowing, and the strong recovery that followed, with high demand, low unemployment and high levels of accumulated savings”.*

Maree Kilroy, a senior economist at BIS Oxford Economics, says, “some preference shifts during the pandemic also buoyed the housing market, such as increased demand for holiday houses, tree-changers moving to regional areas, the return of expats, and people wanting more space or their own space following lockdowns”.*

The Big Question – Will the Property Market Crash?

What the experts are saying:

Eliza Owen, Head of Research, Australia, at CoreLogic points out that “In my mind, a housing market crash is defined by the loss in value and a loss in mortgage serviceability, when you get to a situation where people can no longer service their mortgages, have to sell and when they try to sell, they can’t get enough money to cover the loan,” she says. “That’s not something that we’re seeing in this market.”*

Maree Kilroy, senior economist at BIS Oxford Economics, states that while there is no doubt the property market was in a downturn over the latter half of 2022, a crash is unlikely due to strong economic fundamentals. The first of these is demand, with high rents and the return of overseas migration resulting in more potential buyers and on the supply side, continued low unemployment is limiting the number of properties for sale, with distressed sales not yet evident in the housing market.”*

From our research it’s only really been the rising interest rates emphasizing the property market downturn last year. There are no economic indicators such as a rise in unemployment or an oversupply in the market this is impacting the current state of affairs. Unfortunately, as mentioned early in the article, the Reserve Bank of Australia has increased rates a lot in a very short amount of time. So could this simply be a reflex response of the market to the most rapid increase in the cash rate since the early 1990s? Interest rates are the main thing that have led to this correction in housing values so the key element that drove the housing market upswing has essentially been reversed. Historically the market usually responds with prices going down when interest rates go up but while the increases are small it’s still positive.

The final say

Property prices could go up even more if the interest rates fall again and many are saying that there could be an ‘overcorrection’ forecasted as a result of the recent RBA action and this could happen in late 2023 or early 2024 possibly.

What has become apparent from our research has been the unique conditions caused by the impact of a global pandemic. At present the market is still robust and albeit with low stock levels. With the rising demand from overseas migration and consumer sentiment is expected to change once interest rates stabilise, we might see some economic stress release with the brakes on inflation taking effect. So we may see some good times again for the real estate industry and economy in general.

*Article quotes from ‘Is the Australian Property Market Going to crash, by Forbes Advisor Australia published May 15, 2023.