A new report from Oxford Economics Australia predicts a softer year for home price growth than 2023. Australia’s median home price hit an estimated new record of $939,000 in December 2023, but in the months ahead, the factors that supported sharp inclines last year are reportedly starting to fade.
According to the economic forecaster, Australia can expect home price growth of just 2.7 per cent in the 2024 financial year, before picking up steam to average 6.3 per cent growth each financial year in 2025 and 2026. With 2023 closing out a year where home prices grew 8.1 per cent, this would represent a marked deceleration of the speedy gains recently experienced.
And the writing appears to be already on the wall. Auction clearance rates have dropped from hovering around 70 per cent to near 60 per cent, and some capital cities reported negative quarterly results in the last quarter of 2023.
Maree Kilroy, the report’s author and senior economist at Oxford Economics Australia, explained that as conditions continue to ease, the capital city markets are forecast to be increasingly determined by macro factors, with prices going their separate ways.
“Capital city performances have diverged in recent months. Total listings have risen in Melbourne and Sydney, a trend we expect will continue in coming quarters, acting to slow price growth,” Ms Kilroy said.
“Tailwinds will serve to propel prices in Perth, Brisbane, and Adelaide. Low levels of advertised listings and affordability in pockets will prop up prices in these cities next year,” she added.
Perth, in particular, is predicted to have a strong year. The WA capital – which bucked the 2022 downturn – approached double-digit growth in 2023, but still boasts the lowest median house price of all the major capital cities. Investors are particularly drawn to the affordability advantage offered there, alongside the promising gains.
Oxford predicts 10 per cent price growth for the western city in the 2024 financial year, though the region’s growth will slow slightly as others pick-up, with that figure expected to fall to 9.8 per cent in the 2025 financial year. By midway through 2025, however, it is expected that Perth will no longer bear the title of the cheapest capital in which to buy a home, passing the mantle to Adelaide.
One element that will unite all capital markets is the continuing tug-of-war between affordability constraints and a shortage of supply, with the latter expected to exert its strength as soon as interest rates begin to drop, increasing competition among buyers waiting in the wings.
“Interest rate cuts from late 2024 should boost credit availability, accelerating broad price growth once again,” Ms Kilroy commented.
Rental growth also slows
Nowhere is a shortage of housing supply making its impact more obvious than in the rental market, with affordability ceilings continuously tested by vacancy rates far below healthy territory. According to Oxford, rental growth will also pull back this year though not quite as much as house prices.
Record overseas migration flows exacerbated the already tight rental market over the course of 2023, with the national vacancy rate holding at an extreme low of 1 per cent and total dwelling rents growing by 14.3 per cent throughout the year. Units led that increase, recording a rise of 18.3 per cent.
Oxford Economics Australia foresees slower, yet still strong growth in rents ahead, with houses and units forecast to grow by 4.1 per cent and 5.8 per cent, respectively.
While all states focus on adding supply to the housing market, relief from home building will take time to be felt for Australia’s tenant population.
“Rental affordability has deteriorated over the last two years. This is especially evident in Sydney and Adelaide, which is forcing larger rental households to be formed,” Ms Kilroy noted.
In this market, too, Perth is expected to be the big achiever.
“The Perth rental market is expected to outperform over the forecast horizon, driven by nation-leading population growth and a relative affordability advantage”, said Ms Kilroy.
Both houses and units are forecast to rise by more than 9.7 per cent per annum over the next three years.
Elsewhere, rental growth is ultimately projected to recede to an average of 2.6 per cent in 2025 and 2026 – a rate that the forecasting firm notes is not too far removed from consumer inflation.