With 1.2 sales for every listing in the January quarter, Australia’s appetite for property shows no sign of abating. And while supply pressures are likely to ease in Sydney and Melbourne in 2022, the return of international migration could further boost demand.
Our highly anticipated first property update webinar for 2022 saw over 200 real estate leaders join Macquarie Business Banking’s National Real Estate Segment Head, Domonic Thompson, and CoreLogic’s Head of Australian Research, Eliza Owen, to discuss the year ahead.
“We’re certainly at an interesting point in the market,” acknowledged Domonic. “It was a very strong demand-driven market at the back end of last year. Whilst many business owners spent the holiday season focused on strategy for 2022 and continuing to address the need to transform businesses to more resilient models, we know macroeconomic factors will continue to have a massive influence on the success or otherwise of real estate businesses around the country.”
Eliza described 2021 as, “an eruption of real estate activity, particularly as lockdowns ended in October across Sydney, Melbourne and the ACT. That’s continued into 2022 – I think it was pretty surprising to see January sales volumes 40% up year on year.”
Extraordinary sales uplift intensifies competition
Despite the previous outlook for 2022 being characterised as “softer”, demand is still very strong. Nationally, dwelling sales were elevated in any given month in 2021, around 30% higher than the previous five-year average. Listings haven’t been able to keep up, with total advertised stock currently sitting 36% below the previous five-year average.
Lockdowns failed to dampen sales activity throughout 2021
However, supply is really a tale of two markets, with Sydney and Melbourne listings now on par with their historic averages while Brisbane and Adelaide sit about 30% to 40% below where they would usually be at this time of year.
Total listings nationally are lower than usual
“There is more urgency in Brisbane, Adelaide and regional markets, and it may take a while for these areas to get back to normalised stock levels,” said Eliza. She believes this may be due to affordability creating spill-over demand for smaller capital city markets.
“In the past, it wasn’t so easy for people to move cities just to afford a detached house. But now we have more opportunities for remote work, I think that will keep competition quite high in those areas for longer.”
Real estate agents competing for listings in these low-supply/high-demand areas should be mindful of margin pressures.
“It’s a really competitive market for listings, and we can see commissions being squeezed,” observed Domonic. “Our business barometer from December 2021 revealed that 57% of real estate businesses are demonstrating sub-20% profitability for the financial year.1 Given the strength of the market, we would expect to see higher profits and returns.”
Supply pressures set to ease in 2022
CoreLogic data suggests we should start to gradually see a greater accumulation of total listings, with its Comparative Market Analysis reports a strong lead indicator for pre-listing activity. These jumped 23% year on year in mid-February, suggesting an uplift in new listings by early March.
“I think some vendors might be sensing 2022 will mark a peak, and they’re looking to capitalise on this cycle – particularly in the larger capital cities like Sydney, Melbourne and Perth,” said Eliza. “This is great news for the real estate industry, but it could be a temporary response to market conditions.”
High volumes will be a relief for buyers facing extremely fast selling times. Dwellings in capital cities are selling on average in just 26 days – with Hobart properties taking just 17 days, and Brisbane 18.
Properties are still selling fast, but this is likely to slow
“Real estate businesses will need to be more strategic through the second half of 2022, with market conditions likely to shift. You may need to work a bit harder, moving away from ‘order taking’ to rethink how business gets done,” suggested Domonic. “It’s a journey of change for buyers, sellers, landlords and tenants. To ensure a positive experience, think about the expectations you set with your narrative.”
The construction pipeline is also likely to add to supply volumes, although construction cost and timeframes have blown out through the pandemic. “It will take longer than usual for stock to be delivered, but it’s coming,” said Eliza. “Unit construction is ticking back up in some cities, creating more diverse housing stock.”
The disparity between Australia’s house and unit values reached an all-time high of 28.3% in January. “The ACT market illustrates the impact this has on affordability,” noted Eliza. “Canberra has the second biggest price gap between houses and units, with a typical unit close to $550,000 and a house sitting around $1million.”
Revitalisation of the cities
There is a potential silver lining for the unit market: the return of international students, migration and CBD workers. Rental yields are also starting to recover, and investors are showing an appetite to make the most of these opportunities.
“I think 2022 will be a year for the revitalisation of cities,” said Eliza. “There could be a new market for ‘city crash pads’ – instead of buying holiday homes for the weekend, people might go back into the city for a night.”
Migration data is already showing positive signs for inner city Melbourne and Sydney – but there are also indicators Queensland will benefit as well, with a shift in skilled visas going to the sunshine state.
Rent values stayed relatively flat through 2020, and inner city Sydney and Melbourne experienced a peak to trough decline of about 11%. But as rental demand increased over 2021, these markets are recovering.
Rental markets most impacted by COVID are now starting to recover
Housing finance data indicates investors have been behind the latest uplift in property sales, with investor finance now around 30% of all activity. They are the fastest growing cohort of buyers in the market.
“From speaking with our clients, we’ve seen a net loss of the number of rental properties on management books – probably as much as 15% or more. But this hasn’t impacted revenue as much as you’d expect, as this has been offset by strong vacancy rates and yield increases,” said Domonic. As inner-city units look more attractive again, real estate businesses could expect their property management books to start growing.
The big question is how an almost inevitable rise in interest rates will impact demand across all buyer groups. Eliza noted long-term fixed rates are essentially back to pre-COVID levels. “With inflation about two years ahead of where the RBA thought it would be, and unemployment about a year ahead, it makes sense the timing of a cash rate increase would be revised forward,” she said. However, she said she remains optimistic about the financial stability of the market, even when rates do rise.
While we can expect supply and demand stabilisation to lead to a softening of sales volumes in 2022, there will still be knock-on effects from an extraordinary year of activity. The more affordable capital cities are likely to sustain demand for a little longer, and the return of migration should see demand for inner city markets bounce back. However, real estate businesses cannot afford to be complacent in this market – and it will be far more profitable to compete on client experience than commissions.
To discuss any opportunities for your business, please request a call or speak with your Macquarie Business Banking Relationship Manager.
