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Property prices tipped to stage ‘full recovery’ in 2023–24

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Property prices are expected to stage a full recovery from the 2022 downturn by the end of the next financial year.

A new report by Domain has suggested that the country’s housing market will be in a “well-established, steady recovery” over the 2023–24 financial year.

The Domain Forecast Report tipped that house prices in Sydney, Adelaide, and Perth will hit record highs in that period, while unit prices in Brisbane, Adelaide, and Hobart could also “smash” existing records.

“We’ve already started to see prices rising this year and we’re expecting that to continue, but we’re expecting the recovery to be slow and steady,” Domain chief of research and economics Dr Nicola Powell said.

“Sydney is set to be the one outperformer with the strongest rate of growth, but there will be a lot of different dynamics going on with both push and pull factors, which can have very different impacts.”

Dr Powell noted that the biggest factors driving growth will be the continuing lack of supply of homes on the market and the rise in population on the back of a predicted boost in migrant numbers.

Domain’s report is based on the expectation that interest rate hikes are close to an end, adding an upward boost to the market.

It did, however, flag that the number of people facing the cliff’s edge of variable rate rises after their fixed rates expire will act as downward pressure on prices.

Conversely, Domain noted, if interest rates start to come down from early 2024 in line with market expectations, borrowing/buying power could increase, exerting more upward price pressures on the housing market.

“Affordability will eventually contain the rate of growth with people able to borrow less and being unnerved by higher inflation,” Dr Powell said. “So, while it won’t be smooth sailing, the outlook is much more optimistic.”

Downward factors

According to Domain, some 880,000 Australian households, who have so far been insulated from the last 12 rate rises, will roll over from fixed to variable interest rates near the start of the next financial year.

“Given the higher costs of holding debt, mortgage repayments will be substantially higher and may push some home owners into distress,” Domain’s report reads.

“Reduced borrowing capacity may mean refinancing could be challenging for those who overextended and bought close to the peak. If this occurs, it will inevitably exert downward pressure on property prices as many try to exit the mortgage club.”

On the upside, Domain noted that distressed listings remain low, at 2.8 per cent across combined capitals and 2.7 per cent across combined regionals.

This, it noted, is “significantly lower” than the all-time high in late 2018 at 5.1 per cent for combined capitals and 5.7 per cent for combined regionals in mid-2013.

However, other downward factors include the possibility of a recession, Domain highlighted.

Namely, it cited combined pressures from rising interest rates and the economy eventually reverting to its natural rate of unemployment as substantial reasons for a boost in mortgage arrears and distressed sellers.

“Both of these features will be exacerbated if there is an onset of a recession and will exert significant downward price pressure on the property market,” Domain said.

Upside factors

Upside factors are multiple, according to Domain, with a population boost cited as one of the more significant upsides.

Namely, the firm expects net overseas migration to be at a record high over the current financial year and next — with almost 300,000 additional dwellings needed to house this uptick in population.

“Over FY24 net overseas migration will drive demand for nearly 130,000 extra dwellings across Australia, with NSW, Victoria, and Queensland receiving the largest share of migrants,” it said.

Moreover, Domain predicted that housing construction will contract further over FY24 before starting to recover. With pre-existing housing undersupply said to worsen as a result and continue deteriorating, this is said to exert price pressures upwards.

Oxford Economics says rebound to be ‘short-lived’

Earlier this month, Oxford Economics warned that the recent “stabilisation” in residential property markets is unlikely to endure, with the protracted battle against inflation threatening to trigger further price falls.

Despite data from the Australian Bureau of Statistics (ABS) reporting a $140 billion increase in the value of residential dwellings over the March quarter to $9.8 trillion, Oxford Economics said this rebound is “likely to prove short-lived”, with tailwinds “wearing off”, and headwinds mounting.

These headwinds include the outlook for valuations, the resetting of fixed-rate mortgages to higher variable rates, and the expected deterioration in labour market conditions.

Drawing on learnings from the US, Oxford Economics lead economist Adam Slater said it is “not unusual” for housing price corrections to be “interrupted” by “false dawns”, referencing the prolonged downturn in the US between 2006–11, which included three brief periods of recovery.

Moreover, he warned that the full effect of monetary policy tightening is yet to filter through.

The RBA has boosted rates by 400 basis points since May last year to 4.1 per cent this June.