Why are house prices in Australia rising?

The Australian property market has surprised even the most experienced economists in the aftermath of COVID-19. With a COVID-era boom followed by a 12-month slump, predicting exactly how the economy and property prices will be affected has been a challenge. But for tenants, it’s been the same story of sustained rent rises. 

According to CoreLogic’s Housing Chart Pack, rent values have increased at more than 8% for the past three years, and over the past decade, rents have outpaced dwelling values on three occasions—in 2023, 2022, and 2018. The figures came as CoreLogic revealed that overall for the year 2023, home values increased 8.1% in the calendar year, after falling 4.9% the previous year.

National property prices could rise up to 4% over 2024, and as much as 8% in some capital city markets, new forecasts show. The latest PropTrack Property Market Outlook Report, forecasts property prices across the country will grow between 1% and 4% over the next 12 months, slightly slower than the 5.5% pace of growth recorded so far in 2023.

The Impact of COVID-19

The COVID-19 rebound was incredibly rapid, with prices soaring at their fastest pace in 33 years. CoreLogic figures revealed the aggregate for Australia’s five capital cities surged by 2.8 per cent – the strongest growth since October 1988, when capital cities rose 3.5 per cent for the month.

The market’s revival came despite warnings of a dip in housing prices, forcing major banks to revise their pricing predictions from declines to inclines.

Anyone who thought the boom would be short-lived or suspected the beginnings of a bubble was mistaken. Prices continued steadily upwards and as the Australian property market went from strength to strength.

Economists are now pointing to further growth throughout 2024, with predictions of home prices rising by as much as 7% nationally through the 2024 financial year, proving now could be a wise time for anyone wanting to buy or build a home to make their move.

Modelling by the Reserve Bank of Australia initially forecasted year-on-year growth – 9 per cent in the following year and 8 per cent in 2023. However, the actual property market performance has surpassed these expectations. For instance, the median dwelling value in Perth, which was $578,612, experienced significant increases, reflecting the overall trend in Australian house prices.

This continued growth in property values means that potential homebuyers sitting on the sidelines may pay dearly if they decide to ‘wait out’ the price rises. It also serves as a green light for those weighing up the rent vs buy dilemma, especially given the predicted capital growth in city property markets.

Here, we look at the reasons behind the record-high growth in property prices within the Australian property market and explore why these property values are expected to continue their upward trajectory in the coming year, benefiting property investors and homeowners alike.

Great time to borrow

Australian borrowers have reaped the rewards of low mortgage rates for almost 11 years now. But interest rates have seen significant changes since 2021. As of December 2023, the official cash rate in Australia is 4.35%, with most property owners facing interest rates of 6% to 7% or above. This shift in interest rates, from a record low of 0.1% to 4.35% as of December, has impacted the property markets and borrowing costs.

In contrast to the previous period of low mortgage rates, the current economic climate has seen a rise in interest rates. This shift has been a response to various economic factors, and as of 2024, households are adjusting to these new conditions. Despite this change, the Australian Bureau of Statistics data indicates a continued strong interest in the housing market, with a significant number of new housing finance commitments, although the rate of increase has normalised since the surge experienced in 2021.

However, borrowers have experienced a series of rate hikes as the RBA (Reserve Bank of Australia) responded to changing economic conditions. The RBA’s approach has been to manage inflation, which has fluctuated since the pandemic. As of 2024, the inflation rate has been a key factor in the RBA’s monetary policy decisions, with the central bank closely monitoring economic indicators to guide its future rate adjustments.

Australia’s COVID-19 response

Australia’s response to the pandemic has been the envy of countries worldwide.  Dr Anthony Fauci, director of the US National Institute of Allergy and Infectious Diseases, described Australia as a leader in “containment and management of emerging variants”.

Strict measures such as lockdowns and border closures not only kept COVID cases low compared to other countries such as the UK and US but also maintained a positive Australian economy. The Federal Government’s JobKeeper program helped support one million businesses employing 3.8 million workers. It’s credited with having a large hand in Australia’s economy dipping by just 2.5 per cent in 2020, compared to 9.9 per cent in the UK, 8.9 per cent in France, 5 per cent in Canada and 3.3 in the US.

Now that vaccinations have rolled out across the country, businesses have reopened, and people have been returning to their workplaces.

In addition to the changing interest rate landscape, potential buyers are influenced by the current state of employment. Contrary to earlier predictions of high unemployment rates, the unemployment rate in December 2023 remained steady at 3.8% in trend terms and 3.9% in seasonally adjusted terms, according to the latest ABS statistics. This stability in the job market adds a layer of confidence for those considering entering the housing market.

Better still, the unemployment rate looks to remain steady, maintaining lower levels than previously anticipated. As of the end of 2023, the labour market’s strength is evident, with the unemployment rate consistently below the expected 4.5% mark. This trend bodes well for the overall economic climate and, by extension, the property market.

Australia’s economy experienced significant disruption due to COVID-19, with GDP suffering a cumulative loss of $158 billion compared to its pre-pandemic trajectory. However, the economy has begun to return to longer-term patterns, with most COVID-19-related restrictions and health measures lifted, positively impacting Australian house prices.

Housing shortage impacts on the property market

Housing supply has simply not kept up with buyer demand. In 2023, Sydney experienced a 42% decrease in the number of new homes completed compared to 2018, exacerbating the housing market supply crisis. This means there are more buyers in the market and not enough houses for sale, which is fuelling strong price growth. 

While the number of houses on the market has varied across capital cities, the overall trend has shown fluctuations rather than a consistent decrease. In 2023, CoreLogic estimates there were 488,898 sales nationally, which is slightly lower than in 2022 but now trending higher than the five-year average. This indicates a more dynamic market with changing availability in different regions.

Despite the changing market dynamics, the demand for housing remains strong, as evidenced by the high level of buyer interest in open inspections and auctions. However, the final clearance rate across the combined capital cities trended lower at the end of 2023, with an average final clearance rate of 58.9% in December, indicating a more balanced market between buyers and sellers.

The clearance rates, a key indicator of the property market’s health, have shown variability. In the four weeks ending 17 December 2023, the average final clearance rate was 58.9%, down from 62.5% at the end of November, though still higher than the 55.1% average recorded in the same period of 2022. This reflects a more nuanced property market scenario compared to the earlier highs of 80% in the first quarter of 2021.

More buyers in the market

Buying vs renting

After their COVID-19 imposed hiatus, buyers are now out in force. The sheer number of people searching for the right place can be measured through the REA Insights Buyer Demand Index, which shows buyer demand is almost 50% above the average seen in 2019.

Following the initial COVID-19 hiatus, the property market has seen a resurgence of buyer activity. However, the current trend shows a more balanced scenario. While the REA Insights Buyer Demand Index indicated a significant increase in buyer demand post-2020, the market in 2024 is characterised by a more stable and sustainable level of buyer interest, reflecting the evolving dynamics of the housing market.

While the market saw a strong return for property investors post-2020, driven by healthy capital gains and initially low-interest rates, the scenario in 2024 is different. With the recent rise in interest rates and evolving economic conditions, property investors are now navigating a more complex environment. Despite these challenges, the Australian property market continues to attract investment, albeit with more caution and strategic planning.

In the current market, the dynamics of investor and owner-occupier loans have adjusted to the changing economic landscape. While there was a notable increase in the value of investor loans in the post-pandemic period, the recent data suggests a more moderated growth in line with the overall stabilisation of the property market in 2024.

First-home buyers are also on the buying scene, many of them looking to exit the rental market in light of skyrocketing rental prices. According to the PropTrack Property Market Outlook Report December 2023, the rental market has continued to evolve, with specific trends and changes in rental prices across different regions. This ongoing shift in the rental market impacts the overall property value dynamics.

This sizable jump in rental prices made buying a home a wiser financial decision for many renters – a fact underlined by research showing it is cheaper to buy than rent at 53 per cent of dwellings in Queensland.

The PropTrack Property Market Outlook Report December 2023 predicts that national property prices could rise up to 4% over 2024, with some capital city markets experiencing even higher capital growth rates. This forecast highlights the continued dynamism in the Australian property market.

2024’s property market changes have altered the buy vs rent dynamics. With property prices at new highs, the affordability in Queensland and Western Australia needs reevaluation.

Despite rising interest rates, Australia’s property market continues to grow, driven by tax cuts and population growth. However, growth rates have moderated compared to 2023.

The red hot pace of growth in the median house price and median dwelling value makes it difficult to justify waiting for the right time to buy. In fact, jumping into the market sooner rather than later could be one of the best money-saving decisions any property investors or new-home buyers can make right now.

Ready to make your next move? Find your new home with Satterley today.