Real estate trend forecast

The property market took a hit in 2022 as mortgage rates started to increase much faster than initially expected, rising eight times to end the year at 3.1%. To put this into context, the cash rate was sitting at just 0.1% at the beginning of 2022¹.

“I think what we saw in 2022 was a bit of a roller coaster really in terms of property prices in the property market because we started the year with record prices and then moved into a downturn quite rapidly,” said Nicola Powell, Chief of Research and Economics at Domain³.

Earlier in 2021, RBA governor Phillip Lowe had said that rates would not increase until 2024, but he later stepped back from this statement and apologised to borrowers who based their decisions on his initial comments⁴.

As 2023 begins, property experts are cautiously optimistic that as interest rates plateau, stability will return to the market. 

Impact of interest rate hikes

The property market faced significant changes in 2022 as mortgage rates rapidly increased, but experts predict that 2023 may bring a more stable market. Buyers are now adjusting to the new norm of rising interest rates and factoring them into their decisions.

However, the interest rate hikes of 2022 had a significant impact on buyers. Powell mentions that a mortgage of $500,000 added almost $900 extra to monthly repayments due to the rate increases.

Despite the recent changes, the number of distressed property listings has actually decreased over the month of December, according to SQM Research's Louis Christopher. He attributes this to property owners still meeting their mortgage repayments, despite the rate hikes. Christopher added that he expects there to be interest rate rises this year, but not as many as in 2022. He personally believes that the RBA will pause before reaching 4%.

Softening house prices in 2023: what to expect

The property market may continue to see a decline in 2023, but SQM Research predicts that the falls may not be as severe as some expect if the RBA stops increasing rates before the cash rate reaches 4%. According to SQM, a cash rate of 4% could have a major impact on the market and potentially lead to a crash.

"Based on our survey, a consensus was reached that if cash rates start to go over 4%, or even reach 4%, the risks of major stress in the housing market significantly increase, leading to a rise in default activity and forced selling, putting further.” 

Capital city real estate outlook

According to SQM Data⁵, Sydney continues to have the most expensive median dwelling prices, with a current asking price of $1.27 million as of January 2023, a 3.1% increase over the previous month. With an average capital city asking price of $1.02 million, Sydney remains the most expensive city in Australia. Despite projections of a larger population in Melbourne, the city's limited supply opportunities due to its contained geography will keep it behind Sydney in terms of cost.

On the other hand, Perth offers great value for investment in 2023. With an economy that has successfully navigated the challenges posed by COVID-19, the interest rate increases and the expected increase in demand from Chinese investors for commodities and real estate, Perth presents substantial upside potential.

Different cities offer different financial opportunities, and it is essential to consider one's goals when making an investment. For instance, if one is looking for a steady cash flow, cities like Perth offer much higher rental yields, with yields for houses above 5% and above 6% for units, compared to Sydney's below 3% for houses and just 4% for units.

The return of investors

According to industry experts, first-time home buyers are expected to return to the market in 2023, following an increase in interest rates and cash rate stabilisation. With higher rental yields and rents, investors are also likely to follow, lured by the potential profitability of the property market.

"Once we see some certainty surrounding interest rates and the cash rate stabilises at 4%, we will see more first-time buyers in the marketplace in 2023, followed by investors," says Christopher. Powell adds that the rise in rental yields and rents could be enticing for investors to return to the market.

Rental market to reach its peak

Rental prices have risen dramatically over the past year and a half, with the December quarter seeing the largest annual increase in rental prices, according to Domain⁶. The rental market has seen the longest stretch of record price growth in history, with rents rising 14.6% for houses and 17.6% for units.

2023: A year of recovery

Despite a tumultuous 2022, the future of the Australian property market is looking hopeful for 2023. The cash rate being kept under 4% is a key factor, and if it stays that way, the property market is expected to be divided into two halves this year. While the first half may still see some declines in prices, there's potential for improvement in the latter half of the year.

"I anticipate that by the end of 2023, we'll be seeing the start of a property price recovery," says Powell. "Interest rates are expected to reach their peak at some point this year, with the likelihood of the RBA starting to cut rates again. This trend is expected to reflect in the property market as well, with stabilisation of prices later in the year, leading to a gradual price recovery towards the end of 2023."