Australian Real Estate & Housing Market News

2024 Australian property outlook in five charts

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KEY POINTS
  • With potential rate cuts from the RBA this year, prices may surge closer to 10% rather than the current estimated 5%.
  • Despite rising interest rates and living costs, the persistent housing shortage for both renters and buyers continues to drive up prices and rents.
  • The dwelling shortfall has reached approximately 120,000 units and could climb to 180,000 by mid-2024 due to robust population growth and a significant decline in home construction.

Australia’s housing market started the year on a stronger footing compared to 2023, as early indicators show buyers are back in droves, storming open inspections and pushing auction clearance rates to multi-year highs.

 

CoreLogic’s early results show clearance rates across the combined capital cities rose to 76.2 per cent in the second auction weekend of the year, the highest preliminary clearance rate in 18 months. The first auction weekend this year cleared 73.9 per cent.

 

Sydney clocked up an 80.4 per cent clearance rate, the highest in more than two years, while Melbourne posted a 73.1 per cent, its best result since mid-July last year.

 

Clearance_Rate_Feb15_2024_APU

 

Tim Lawless, CoreLogic research director, says while there were some elements of seasonality, the stronger auction outcomes could be due to a boost in sentiment amid expectations of earlier-than-expected interest rate cuts.

 

Separate data from Neoval, a data analytics company owned by Ray White, shows the number of buyers attending open homes averaged 16.5 last month - eclipsing the 15.6 long-term average. 

Nerida Conisbee, Ray White's chief economist, says house prices were responding quickly to increased demand.

 

In the past five weeks alone, house prices lifted by 1 per cent, according to Neoval data. 

“If this rate of growth continues, house price growth this year will exceed 2023 levels to hit 10.5 per cent,” Conisbee says.

 

“If rates are cut, there is potential for this to be even higher.

 

House Rate_expectations_Feb16_2024_APU

 

What to expect this year

 

Most economists and major banks are expecting house prices to increase by around 5 per cent this year, which is smaller than the 8 per cent gain in home values last year. They cited the persistently high costs of living, interest rates and weakening of the jobs market as the main drags for values this year.

 

So will house prices rally this year or will poor affordability finally catch on?

 

Let’s look at the case for a stronger year ahead first.

 

The Reserve Bank of Australia decided to keep interest rates on hold at its February meeting but the money markets are now pricing in two 0.25 percentage point rate cuts this year after inflation numbers came in lower than expected. 

 

Carlos Cacho, chief economist at investment banking group Jarden, says if the RBA cut interest rates by 0.5 percentage points as the market expected in the third quarter, house prices could start rising strongly towards the end of the year.

 

“We estimate that each 0.5 percentage point of cash rate cuts are worth around 4 to 5 per cent for house prices,” he says.

 

“We’re expecting house prices to increase by 5 per cent this year which is slower than the 8 per cent rise last year. We’re not expecting rate cuts this year, but if the RBA cuts rates, then prices could increase closer towards the 10 per cent range rather than the 5 per cent that we’re expecting.”

 

housing proces_cycles_16Feb_2024_APU

 

CBA is predicting three rate cuts equal to 0.75 percentage points this year and another 0.75 percentage points in the first half of 2025, which would take the cash rate to 2.85 per cent. The bank is also predicting prices to increase by 5 per cent this calendar year.

 

While the timing of the rate cut is uncertain, some economists such as Phil O’Donaghoe, chief economist at Deutsche Bank, are predicting the RBA could start slashing rates by as early as May amid signs the consumer price index could be slowing faster than expected.

 

“Across the last two months of 2023, Australian underlying inflation as measured by the monthly trimmed mean indicator fell by 1.3 percentage points. If that is repeated in the first two months of 2024, the monthly trimmed mean indicator would print at 2.7 per cent year-on-year in February, which means underlying inflation could already be back in the RBA's target range,” O’Donaghoe says.

 

“A May rate cut is not an immaterial possibility. I think the RBA has been keen to preserve the employment gains and the unemployment rate is rising now. So they have a good opportunity to preserve those employment gains the quicker they take the pressure off the economy.”

 

The newly revised Stage 3 tax cuts which will kick off from July 1 could provide only a modest boost to the housing market. However, when combined with a 0.5 percentage point rate cut, the impact would be more significant according to mortgage broker Redom Syed of Confidence Finance.

 

He calculates that the combined effect of the new tax cuts and rate cuts would boost borrowing capacity by 10 per cent, which will likely translate into further house price gains.

 

Rate cut and undersupply to fuel the next housing boom

 

Shane Oliver, AMP chief economist says the ongoing lack of supply of housing for both renting and owning is fuelling further lift in prices and rent, despite higher interest rates and surging costs of living.

 

“The undersupply problem will remain in place and that will help protect prices from falling deeper and ultimately help drive the next cyclical rebound,” he says.

 

“It's quite possible the trigger for the next boom will be the RBA moving to cut interest rates sometime later this year and that fundamental underpinning will remain the undersupply of property.”

 

Dwelling_shortage_Feb16_2024

 

Oliver says the accumulated dwelling shortfall has blown to around 120,000 dwellings and could rise to about 180,000 by the middle of this year, driven by strong population growth and a sharp drop in home-building construction.

 

But there are risks ahead

 

Yet, he is not convinced house prices could surge again this year due to poor affordability and a weaker economy.  

 

“There is now a wide divergence between buyers’ capacity to pay for a property and current home prices – which we estimate to be around 28 per cent,” he says.

 

Purchasing_Power_Feb16_2024_APU

 

“Our assessment has been that the high rates along with signs that immigration levels have peaked, waning saving buffers and access to the bank of mum and dad and higher unemployment would see property prices fall again this year with a modest 3 to 5 per cent fall, albeit with significant divergence between cities,” he says.

 

Jarden’s Cacho says the outlook for house prices also depends on the level of listings coming into the market.

 

“Supply is going to be a key factor in our view,” he says. “While demand is solid at the moment relative to supply, affordability and borrowing capacity constraints mean that the level of demand is actually kind of quite narrow.

 

“So if you were to see a large increase in supply, price growth could moderate pretty significantly. We have seen that Sydney and Melbourne fell through the tail end of last year and kind of earlier this year as well.” 

 

“We estimate that each 0.5 percentage point of cash rate cuts are worth around 4 to 5 per cent for house prices,” he says.

 

The other big issue is unemployment, says Cacho. “If it deteriorates faster than expected, the housing market could soften, but if supply remains as it is, and the demand stays strong, the anticipation of RBA cuts could drive a pickup in activity especially if people fear about missing out again.” 

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