AUSTRALIA’S property market started 2022 on high, with record property prices following a very strong run of price growth.

But after April this year the tide turned. The boom was clearly over, and a correction set in. But it hasn’t all been bad news, with the forecast for 2023 already looking rosier.

What factors have impacted on the property market?

It’s been a big year for the market, with lots of different factors having an impact on it.

We had the Federal election and the policies that came with the new ALP Government, led by Anthony Albanese, including the Help to Buy shared equity scheme.

We’ve also seen different policies proposed and/or implemented by State Governments.

Planned changes to land tax from the Queensland Government, which would have made people who own properties in multiple states pay land tax in Queensland at a rate based on all their holdings, not just those situated in Queensland, were eventually shelved after an uproar.

In Victoria, however, the Government will introduce a Windfall Gains Tax from July 1, 2023, applying to large windfall gains that come from planning decisions to rezone land, with the total value uplift to be taxed at 50% for windfalls above $500,000

This year New South Wales has also passed stamp duty reforms to allow first home buyers to pay an annual land tax rather than upfront stamp duty.

In 2022 we also saw many builders hit the wall due to huge rises in costs for materials, labour and shipping for the past few years. The latest CoreLogic Cordell Construction Cost Index found national residential construction costs had risen by 11 per cent over the 12 months to September, which was a record.

While all these factors – and others – have had an impact on the market, by far the biggest factor impacting the overall property market this year – and the major catalyst for price falls – was interest rate rises.

In May we saw the first interest rate rise in Australia in nearly 12 years and the first move in interest rates since November 2020 when the RBA dropped the cash rate to the emergency low of 0.1 per cent during the pandemic.

In this month the cash rate rose – somewhat unexpectedly – by 0.25% from its historical low and since then we have seen it rise by three per cent in total, with a rate rise every month since, with the intention of combatting inflation.

Interest rate rises

What has happened to prices this year?

While prices started on a high this year, there were signs towards the end of last year that price growth was already moderating, with affordability starting to bite.

Affordability has been a big focus for the market – particularly from governments – in the latter part of 2022, and while it is  still a big issue, we have actually seen prices fall back this year, which has led to a slight improvement.

We have now seen seven months of consecutive prices declines, according to the latest CoreLogic Home Value Index, with prices now seven per cent – or $53,400 – below the peak recorded in April.

It should be noted, however, that the falls follow a 28.6 per cent increase over the boom, adding around $170,700 to the value of an average home, according to CoreLogic.

The biggest falls in prices have been seen in Sydney & Melbourne but the declines are decelerating in these cities. Sydney has the only city to record more than a 10 per cent fall in prices, but it also saw growth of 27.7 per cent during the upswing.

Interestingly, Perth and Darwin haven’t seen price falls over the downturn.

While some have seen a loss in the value of their property due to price falls this year, others have taken advantage of the market to secure properties at discounted prices, which will rise in value when the market picks up again.

While prices have been falling, rents have been rising

It’s no secret that the rental market in Australia is now very tight, with vacancy rates around one per cent or lower in most parts of Australia.

The cities with the tightest vacancy rates – under one per cent – are Brisbane, Perth, Adelaide and Hobart, according to SQM Research.

As vacancy rates have fallen, rents have risen, with the two resulting from a lack of rental supply compared to demand, with net overseas migration also on the rise.

Rental growth for houses has been the strongest in Brisbane, with rents rising by 13.4 per cent over the past year.

For units Sydney saw the greatest growth in rents of 14.7 per cent, followed by Brisbane at 14.3 per cent.

Rental growth does look to be moderating now, with the rate of growth having fallen from 3.1 per cent in the July quarter to 2.5 per cent in the September quarter, according to CoreLogic.

As prices have fallen and rents have risen rental yields have been increasing, which is good news for investors.

According to CoreLogic figures gross rental yields across the combined capitals rose to 3.5 per cent in November, up from a low of 2.96 per cent in February.

property 2023

What’s in store for next year?

With inflation now starting to slow interest rate rises have been more moderate, with the last three rises being 0.25 per cent.

While many factors are at play there is some speculation that rate rises may cease in the first half of next year and the cash rate may even possibly fall, which could trigger a return to price growth, but it’s too early to tell if that will eventuate.

Price declines now at least appear to be slowing, with the rate of decline moderating since August. The latest CoreLogic Home Value Index found prices fell by one per cent nationally in November, which was the smallest monthly drop since June.

We know at least that demand still outweighs supply, which will underpin price growth moving forward, particularly as overseas migration continues and even ramps up.

With housing affordability starting to improve as prices have moderated, there will likely also be more domestic buyers looking to get into the market in 2023, particularly as uncertainty over interest rate rises abates.

According to CoreLogic, some measures of housing affordability are easing.

Across the combined capitals, the median dwelling values to income ratio reduced from 8.4 in the March quarter to 7.9 in the September quarter.

The number of years estimated to save a 20 per cent deposit also trended lower, from 11.1 in March to 10.6 in September.

However, the flipside to lower affordability barriers is worsening serviceability costs, said CoreLogic’s research director Tim Lawless.

“Potentially we are seeing the initial uncertainty around buying in a higher interest rate environment wearing off, while persistently low advertised stock levels have likely contributed to this trend towards smaller value falls,

“Across the capitals, total listings haven’t been this low at this time of the year since 2010, and regional listings are at their lowest level since 2007. This is likely a key factor offsetting the negative impact of higher interest rates and low consumer sentiment.

“However, it’s fair to say housing risk remains skewed to the downside while interest rates are still rising and household balance sheets become more thinly stretched.

“There is still the possibility that the pace of declines could reaccelerate, especially if the current rate hiking cycle persists longer than expected.

“Next year will be a particular test of serviceability and housing market stability, as the record-low fixed rate terms secured in 2021 start to expire.”

However Mr. Lawless said household savings and a history of higher than required mortgage repayments should also provide a buffer to higher mortgage rates and cost of living pressures.

He said the trajectory of interest rates remains the most important factor for housing market conditions moving forward.

About Tyron Hyde

Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.

Learn why more Property Investors Choose Washington Brown to prepare their depreciation reports.