Australia’s housing market continues to defy expectations. Despite further interest rate hikes, property values have risen for two consecutive months. Until supply responds to demand, the upturn seems likely to continue.


Over 400 business leaders joined our recent property update webinar, where Macquarie Bank’s National Head of Residential Real Estate, Dominic Thompson, and CoreLogic’s Head of Residential Research, Eliza Owen, discussed the surprising upswing in Australia’s housing market.

Here are the five key insights from their conversation.

1. Demand is offsetting rate rises

Capital city home values rose 1.4% in the three months to April – the first quarterly lift since May last year. This disrupts the very short, very sharp, peak to trough decline of 9.7% that ran until February. Such a correction is only surpassed by the much slower 10.2% fall recorded between 2017 and 2019.

“It’s interesting to see the quick succession of these last two downturns,” Thompson observed. “The question is, how sustainable is the trend for property prices to rise at the same time as cash rates?”

The most recent decline is the steepest on record

While the cash rate can be a good short-term indicator of price growth, other factors – including population growth and supply of dwellings to market – can have a larger impact over time.

“A good comparison might be the early to mid-2000s, when we saw a surge in overseas migration and structural economic growth as a result of the mining boom,” explained Owen. “Even though rates were also rising during this period, we saw higher home values and I think that’s what we’re seeing now.”

Clearance rates, which reflect the percentage of homes sold at auction, have also improved. Nationally, the clearance rate has held at 65% over the four weeks to May 10, compared with 55% at the end of 2022.

“We’re seeing properties take less time to sell, and a bounce back in ABS housing finance data,” Owen added. Home lending increased across all buyer groups in the first quarter of 2023 but, most notably, grew 7.3% among first home buyers.

This could signal that prospective first home buyers who can afford to, and may be feeling insecure about rental market conditions, have taken advantage of the peak to trough decline" Owen said.

2. Premium properties are leading the recovery

The higher end of Australia’s housing market is considered a barometer for cyclical change with the top 25% of houses (valued at over $1.2million) and units (valued at over $800,000) typically leading a recovery.

Combined capital city values lifted 1.4% last quarter, while at the top end of the market, house values grew 2.3% and unit values were up 2.2%.

“The higher end acts as a leading indicator, and we would expect to see a more robust recovery in the lower end eventually. That reaffirms we’ve entered the next stage of the cycle,” said Owen.

3. Vendors are holding back on listings

Buyers meanwhile are being confronted by persistently low levels of stock.

“The supply and demand mismatch appears to be driving this recovery,” noted Thompson.

Owen described vendor listings growth as “absolutely lacklustre” compared with previous years.

“Over the past four weeks, about 19,000 new properties were added to the market – but there were 21,000 sales. We’re just depleting stocks. Total listings are around 24% below what we would usually see at this time of year.”

Capital city listings are down, unable to satisfy homebuyer demand

4. Rental markets are still tight

Overseas migration is estimated to add a record 400,000 people to Australia's population in 2022-23. This combined with record low vacancy rates, is expected to add further pressure to a growing rental crisis. Capital city unit rents rose 16.2%1 in the 12 months to April 2023.

Just 1% of rentals are currently vacant across capital cities, easing slightly to 1.4% in regional markets. Owen says traditionally strong migration areas, such as the Gold Coast and Sunshine Coast, are now being overtaken by more affordable markets like Ipswich and Logan – Beaudesert in southeast Queensland2.

Rental markets remain extremely tight, especially in the capital cities

As regional population flows normalise post-Covid, regional house price growth is also easing. Yet regional home values remain 31% higher than in March 2020.

“It looks like the supply/demand mismatch is starting to ease in the regions, but there is no end in sight for lack of supply in the capital cities,” said Thompson.

5. Construction constraints continue

It will take time to tackle the systemic supply shortage, with little capacity to respond in the short-term. The construction sector is still navigating tight labour and materials markets, project timeline blowouts, and a number of high-profile builder insolvencies.

“Recent government announcements, including the new build-to-rent tax concessions and the objective of building a million affordable homes, won’t kick off until 2024,” noted Owen. “And that makes sense – commencing projects at that scale will only further increase labour and material costs, adding to inflation pressures.”

With average construction timeframes increasing from 6 to 12 months, there is a high number of dwellings due for completion within the next year. But lagging approvals won’t sustain that building activity and address supply issues.

While there is a backlog of construction nearing completion, there is little coming down the pipeline after it.

Housing approvals have been relatively subdued over the last six months. Detached house approvals are sitting around 15% below the decade average following the end of the HomeBuilder program. When it comes to units, developers may be struggling to get presales, or may prefer to delay projects until consumer sentiment improves.

So, what will ease the pressure on an undersupplied housing market? Owen says supply is determined by price, not the other way around.

If property prices continue to rise, we will eventually get a lift in selling activity, and developers will lift construction activity" Owen said.

The potential impact of further rate rises, or an economic downturn, could also affect the supply/demand imbalance, if some homeowners struggle to make their mortgage repayments.

“One of the big questions of 2023 is how some borrowers will adjust to the higher variable rates, with 880,000 fixed rate loans expiring this year,” noted Thompson.

“APRA data suggests there hasn’t been any substantial uptick in late payments, and RBA data indicates around half of households have at least a year’s buffer on their mortgage. If 3.85% is the RBA’s limit we may get through this period relatively unscathed,” Owen said.

Both agreed that if there is a cash rate reckoning, this is the year we'll know. But for now, the data seems to point to a sustained recovery in Australia’s residential markets.


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