2023 is set to be a year of mixed fortunes for the Australian property market, with both challenges and opportunities on the horizon. While some sectors face a level of uncertainty, others have managed to weather the storm and are poised for growth. In this article, we delve into the key factors that will shape the Australian property market in the coming year.

 

After an extraordinary growth spurt in 2021, the residential property market saw a slowdown in 2022 as interest rate hikes and inflation impacted the market. As interest rates continue to rise, the residential property market is poised for another test. With record-low fixed-term mortgages set to expire and new variable rates hovering between 5-6%, low consumer confidence could push the market into a deeper downturn. While this could lead to more homeowners needing to sell, creating additional supply in the market, there are still opportunities to be found.

 

Australian Property Market 2023: Navigating Uncertainty and Bright Spots

As we enter 2023, the Australian property market faces several challenges and uncertainties. However, amidst these factors lie some bright spots that savvy investors can leverage. In this article, we explore the key trends that underpin the performance of various Australian property market sectors and offer insights on what lies ahead.

 

Residential Property Market Outlook: Despite the slowdown in 2022, the residential property market experienced tremendous growth after the pandemic-induced lockdowns in 2021. Interest rate hikes and rising inflation caused a slowdown in the market, leading to lower volumes. With further increases in interest rates and low consumer confidence, the housing market could face a deeper downturn.

 

As 60% of fixed-term mortgages secured in 2021 are set to expire this year, the market stability will be put to the test. While there may be additional supply hitting the market, not all markets will be impacted equally. Understanding previous property price cycles can help shape our understanding of what lies ahead.

 

Will There Be a Housing Market Crash?

Amidst the concern surrounding a potential housing market crash, it is important to place market performance in context. Australian residential property markets are known for their roller coaster property price cycles, and not all markets are impacted equally. Each state is at its own stage of the property cycle, with some property values falling, while others remain stable or continue to rise. By understanding the nuances of each market, investors can make informed decisions and navigate the uncertainty of the property market.

 

As we move into 2023, there continues to be a mix of factors affecting the Australian property market. While the country’s economic and financial outlook faces many challenges in the coming year, there are some bright spots, if you know where to look. In this article, we spotlight some of the key factors underpinning the performance of the various Australian property market sectors.

 

The residential property market experienced extraordinary growth fuelled in part by a post-lockdown bounce-back in 2021. Much lower volumes hit the market in 2022, with interest rate hikes and rising inflation causing a slowdown. As these conditions continue to create a level of uncertainty in the marketplace, moving forward, the market in general will hinge on the effects of interest rate rises.

 

Further increases in interest rates and low consumer confidence could push the housing market deeper into a downturn. Around 60% of record-low fixed-term mortgages secured in 2021 are set to expire this year, rolling back into an environment where the average new variable rates are sitting between 5-6%. This will be a major test for the stability of the housing market around the country. While the majority of homeowners will still be able to sell their homes, there may be some additional supply hitting the market as people need to sell which would likely put further downward pressure on Australian housing prices.

 

While a lot of the Australian property news is focused on a potential housing market crash, it is important to place market performance into context, as we can learn from previous price cycles to help shape our understanding of what could lie ahead. Residential property markets in Australia are known for their roller coaster property price cycles. While overall the Australian property market is in a downturn, not all of the nation’s property markets are being impacted equally. Each State is at its own stage of the property cycle and within each capital city there are multiple markets with property values falling in some locations, and stable in others and there are a few locations where housing values are still rising.

 

We are currently in what market commentators refer to as the adjustment phase of the property cycle. Some commentators believe this correction had to occur after house prices across the country got ahead of themselves. By both historical standards and global standards, household debt to household income in Australia had risen to significantly high levels, driven largely by the size of mortgage debt held by households. While interest rate rises affect the market, they are only one factor affecting home prices. Other key factors include housing supply and demand, population growth, and changes to government policies and incentives.

 

Property markets in Australia are experiencing an adjustment phase, which some commentators suggest is necessary after prices rose significantly, and household debt to household income reached historically high levels. A housing market crash typically occurs when there are forced sellers who must sell their properties at significant discounts due to rising mortgage costs, leading to an inability to keep up with payments. However, rising interest rates are not expected to create a housing market crash as borrowers were able to cope with similar levels pre-pandemic. Additionally, high unemployment is not currently a factor in Australia, and low rental vacancy rates across the country indicate a strong demand for new developments, particularly apartments.

 

Demand for apartments is expected to continue due to low supply, as surging development costs limit the availability of new apartments. Immigration, which is expected to add an additional 2.3 million people to the Australian population over the next 10 years, represents a significant potential stimulus to the housing construction industry. Rising interest rates and construction costs present challenges, but strong rental markets and the forecast of continued immigration make for a compelling thesis for property development exposure.

 

The COVID-19 pandemic caused a shift in workplace culture, with a significant amount of office space now vacant or below capacity. Experts predict these spaces will be repurposed, with plans for high-density residential apartments, student accommodation, childcare centers, and warehouses moving in.

 

The commercial property market is expected to outperform in regional areas, with comparative growth opportunities for rents and yields, as interstate migration patterns continue to evolve. While rising energy prices will have a major impact on outgoings, the OECD forecasts Australia's economy to outperform many other advanced economies. Energy-efficient buildings with great base building offerings and tenant amenities still offer good long-term value for investors. Overall, the commercial property market in 2023 presents a unique set of opportunities and challenges.

• Property market correction presents an opportunity for investors: The current adjustment phase in the property cycle presents a unique opportunity for investors to enter the market at a more affordable level. Historically high levels of household debt to income ratio in Australia have driven a necessary correction, which is expected to stabilize soon. With demand for new developments remaining strong, particularly in the apartment market, and immigration expected to add millions to the Australian population over the next decade, the potential for stimulus to the housing construction industry is significant. While rising interest rates may create some uncertainty for investors, the strong rental market and forecasted immigration suggest a promising future for property development.

 

• Commercial property set to outperform in regional areas: As the workplace culture has undergone a significant shift with the COVID-19 pandemic, commercial property in regional areas is expected to outperform in the future. The changing factors in the commercial property market, including rising energy prices and evolving migration patterns, offer a unique set of opportunities and challenges in 2023. While the risk premium on commercial property is tight, the sector is expected to return to supply/demand rebalance relatively quickly as supply slows over the next few years and demand strengthens. Energy-efficient buildings with great base building offerings and tenant amenities still offer good long-term value for investors.

 

• Industrial property market presents a solid investment opportunity: The industrial property market has enjoyed a strong performance in recent years, and is expected to continue outpacing supply throughout 2023. A resilience to the COVID-19 pandemic created enormous buyer demand in the industrial property market, particularly for logistics and warehouse premises. The pandemic-induced changes in consumer preferences, particularly around online shopping, have driven demand for warehouse space to historically high levels, and industrial vacancy rates in Australia are the tightest logistics market in the world. With investors seeing enduring potential in the industrial property market, the biggest challenge now facing the sector is a lack of future development and high pre-leasing occupancy on new builds, which presents a unique opportunity for savvy investors.

 

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