We don’t have a crystal ball but here are some of the things that we think will happen in residential property markets in 2023.
We’re yet to see the peak of interest rates but at this point, it’s likely to happen early next year. Conditions can of course change quickly however, as of writing, fuel prices have pulled back, supply chain blockages are improving and most recently, we saw inflation pull back slightly. With interest rates rising so rapidly, we’ll start to see rising unemployment next year and this is likely to result in interest rates coming back down later in 2023.
House price data from Neoval, a new property analytics company backed by the White family, has already recorded house prices stabilising across Australia. While this may just be a temporary reprieve, at some point, increasing population growth and a shortage of homes will lead to price pressures that will overtake higher interest rates. Already this is showing up in rental levels. With interest rates starting to stabilise, it will also result in house price growth starting up again.
Holiday homes were hot property during the pandemic. Interest rates were low, many of us could work anywhere and we were restricted to holidaying close to home. Interest rates are increasing, many employers want people back in the office at least some of the time and international borders are back open. Add to this growing shortages of long term rentals in many regional beachside locations. This is leading to a crackdown on vacant holiday homes. All of this is likely to lead to more holiday homes on the market.
The pandemic sparked the biggest movement to regional Australia ever recorded. While we won’t know for sure until later next year, it’s likely that this movement has now slowed considerably, however it’s unlikely to have ended. The main reason for this is that population movement was already occurring prior to 2020, driven by affordability and improvements to transport links to regional areas. This trend will continue and will particularly benefit those areas close to capital cities that offer high levels of amenity.
Inner city living wasn’t much fun during the pandemic. Much of what makes it great such as great restaurants and entertainment were not available. In addition, living in small places is more problematic when you need to work and study there every day. As a result, we saw record movement to regional areas and very high demand for bigger homes. This is now starting to change back as we move on from pandemic restrictions. Rents are rising again in many inner city apartment markets and pricing will follow from this, further fueled by much lower levels of new development.
Population growth and restrictions to housing supply show up most quickly in rental rates, although as discussed above, will also impact pricing in 2023. With population growth accelerating in 2023, as well as construction problems continuing to slow down housing supply, rents will continue to rise. One balancing factor will be lower levels of household formation. Moving out of home, or leaving a shared house, will become less likely as rents and the cost of living continue to rise.
Construction costs are now the biggest component of inflation, having risen by over 20 per cent over the last 12 months. Interest rate rises however are slowing down demand for renovating and building new homes. Similarly, many of the problems that have plagued the industry such as blocked supply chains and labour shortages are now being resolved. Building costs are unlikely to drop considerably however it’s likely that it will be easier to find a builder in 2023 and cost escalations will slow.
It was a hot topic before the pandemic and after seeing the strongest house price growth ever recorded through 2021, it’s now an even more urgent issue. Most recently, the Productivity Commission has found that many first home buyer incentives introduced over the past decade have worsened affordability, as opposed to making it easier for people to get into the market. As a result, expect a greater focus on housing supply, rental stress and social housing.