Hot and Getting Hotter: Sydney’s Housing Market
At the beginning of 2024 economists were predicting that Australia’s housing market would cool down, but the opposite seems to be happening – in fact, things are hotting up.
Rather than coming off the boil, property prices are defying the laws of economics with a unstoppable upward trajectory.
Oxford Economics Australia predicts that Sydney’s median house price will reach around $2 million in the next three years, a trend driven by the prospect of interest cuts, strong immigration and an ongoing housing shortage. [1]
Maree Kilroy, Oxford Economics senior economist, says Sydney’s median house price reached $1.1 million in March this year and shows no sign of slowing down.
“The Australian housing market was caught between two opposing forces in 2023 – higher interest rates and a fundamental undersupply of dwellings,” she said
“The weight of demand eventually won out.”
Cashed-up buyers and investors are continuing to snap up available property, often paying well above the reserve prices. Auction clearance rates are at record highs across the country, with Sydney reaching an impressive 81.6% in April. [2]
Ms Kilroy says the situation has been exacerbated by the presence of so many overseas buyers and so-called mum and dad investors who are not exposed to interest rate fluctuations.
“You have a fundamentally undersupplied market and with net overseas migration[and] a growing participation by foreign buyers, downsizers and cash buyers,” she said.
“Expectations of rate cuts later this year have also propped up buyer confidence in early 2024.”
Watch out for interest rate tailwind
Several economists predict that any future cuts by the Reserve Bank of Australia (RBA) to interest rates – expected to occur later in 2024 – will drive the property market to new heights.
Earlier this year, the Commonwealth Bank’s head of Australian economics Gareth Aird said he expected the RBA to make a modest cut to the interest rate from September, sparking a surge in the price of apartments and houses. [3]
“As soon as rates come down that is a tailwind for prices because as rates go down it increases borrower capacity,” he said.
Mr Aird says lower interest rates, widely forecast for later this year, are likely to boost investor demand, putting even more pressure on an already tight property market.
He expects strong a price growth in all capital city property markets, tipping a price rise of 4% in Sydney during 2024.
Observers say that RBA has to balance the needs of those with a mortgage with the fear that any interest rate cut might drive up inflation.
Louis Christopher, founder of property analytics firm SQM Research, said the RBA runs the risk of overheating the market if it cuts rates against a backdrop of rising prices, strong migration figures and a falling supply of new homes. [4]
“There’s a lot of angst out there about rents and housing prices already,” she said.
“To do that [cut rates] would be potentially quite dangerous for the market and the economy overall.”
More Bad News for Renters
The impact of high immigration coupled with a shortage of available property is making life harder for anyone renting in Sydney, a fact reflected in the city’s historically low vacancy rates.
Earlier this month Domain reported that rents for both houses and apartments had hit an all-time time high across Australia, with the average rent for apartments outstripping those for houses.
Dr Nicola Powell, Domain’s chief of research and economics, says many people from overseas prefer apartment living to be closer to the city. This demand for units has narrowed the gap between unit and house rents. [5]
“Units tend to be centrally located,” she said. “They’re close to major working hubs and infrastructure hubs, whereas houses will be typically in your outer or in your middle suburbs.”
According to the Domain Rent Report Sydney remains the most expensive capital city in which to rent a house, with the median asking rent rising by $20 a week over the past three months to $750 a week. The median rent for a unit is now $700 a week.
But the situation for renters in Sydney and Melbourne is destined to become even worse as investors exit the market because of high interest rates and rising maintenance costs.
PropTrack research suggests that one in 10 homes sold nationally on realestate.com.au during the March quarter were investors pulling out the market, double the rate in pre-Covid 19 Australia. [6]
PropTrack senior economist Paul Ryan says the national pool of rental properties is not keeping pace with Australia’s population growth.
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Sources:
[1] Australian Financial Review
[2] Australian Financial Reivew
[3] Domain/SMH
[4] Australian Financial Review
[5] Domain/SMH
[6] The Australian