Australian housing market 2023: Prices were supposed to go down but they went up. What will 2024 bring?

This year has left many of us scratching our heads, questioning how – and why – property prices went up.

To say the property market took the nation by surprise in 2023 would be an understatement. We entered the year with forecasts predicting that interest rates would keep rising (they did) and house prices would keep softening (they didn’t). 

The reverse happened. In the face of continued interest rate hikes, persistent inflation, and a deeply negative consumer sentiment, house and unit prices kept rising. In some cities, they posted some of their steepest price gains in years.

According to Domain’s End of Year Wrap 2023, the median house price across all capital cities has reached a new high of $1,084,855.

The regional median house price has hit a record $591,139.

How did house price growth defy interest rates?

It should not have been fertile grounds for a price recovery.

The once-in-a-generation property boom of 2021 ground to a halt in 2022 as inflation surged to a 20-year high, and the Reserve Bank of Australia began lifting the cash rate.

A sharp downturn in most capital cities followed, amid talk of a looming recession. 

This year was going to be the year buyers would have the upper hand and nab a “bargain” (relatively speaking, of course).

But this is Australian real estate. It is nothing if not endlessly surprising.

Prospective sellers were understandably cautious in the first half of this year, holding back on listing their homes for sale, but that scarcity of new listings fuelled buyer competition. 

Unprecedented population growth following the pandemic, low unemployment and the extraordinarily tight rental market meant there were more buyers than sellers in the market. And so property prices went up.

Then, motivated by the price recovery and the belief that interest rates were close to their peak, sellers regained confidence.

Winter became the new spring, with an influx of properties hitting the market at a traditionally quiet time. Domain’s report showed that new listings surged above the five-year average in August, especially in Melbourne and Sydney. 

Despite the rise in listings, prices have continued to increase since then, just not as quickly. But they are still increasing.

Domain’s report revealed Australia ends 2023 with house prices largely recovered. Brisbane has fully recovered from the downturn; Sydney house prices have only $7000 left to break through to a new price record; Melbourne is just 4.1 per cent from its peak, and in Adelaide and Perth, well, they never really suffered a downturn at all.

It’s been a bitter pill to swallow for those looking to get a foot onto the property ladder. Not only is it more expensive to buy (not to mention rent), but each interest rate rise has slashed borrowing capacity. 

Over the past 18 months, mortgage holders have been slugged with 13 rate hikes, including five this past year, to lift the cash rate from 0.1 per cent to 4.35 per cent. 

One of the more dominant and prevailing headlines going into this year was the “fixed-rate cliff”. Some speculated it would have catastrophic consequences for Australia’s housing market when thousands of mortgage holders came off their lower fixed-rate loans, causing an avalanche of fire sales and home prices plunging.

But again, it was not to be. Domain’s report found the rolling-off of fixed rates has, by and large, not translated into a spike in distressed listings, and report author Dr Nicola Powell says mortgage arrears are sitting at historic lows.

“The impact on borrowing capacity and mortgage affordability has cut deeply [but] despite the higher interest rates, the vast majority have managed the transition,” she says.

“Mortgage arrears have risen but remain near historic lows.”

Why did property prices rise so rapidly?

The answer lies in a combination of factors but is undoubtedly led by Australia’s housing undersupply.

Dr Powell says the severity of our housing undersupply has been “laid bare” this year because it happened to collide with rapid population growth.

“Our housing shortfall runs far deeper than initially thought,” Powell said. “This is the year that has uncovered that, and Australia has had a real wake-up call about our undersupply of housing.

“The shortfall of housing in this country has been placed well and truly in the spotlight and become part of the mainstream national conversation. This has certainly overflowed into the rental market, driving the longest continuous stretch of rising asking rents on record.”

Australia’s housing undersupply is more dire and more urgent than perhaps anyone, particularly the government, realised, Dr Powell says.

“If you are that person who can’t buy a home, or you can’t get a rental, or you’re homeless, or even if you’re living in a home that doesn’t suit your needs – we call it under-housed – then it is a dire situation,” she says.

“Hopes continue to be dashed. There is a generational divide being created. And there is also that intergenerational wealth that will continue to unfold as Baby Boomers age. They will pass on their properties, or even skip a generation and pass it on to their grandchildren, making it even worse.

“If you are not in a family like that who will shift the dial for you, it will be very difficult to shift the dial for yourself.”

What’s the outlook for Australia’s housing market in 2024?

The property market outlook for 2024 is uncertain. Population growth and undersupply are expected to continue putting upward pressure on prices.

To address the housing supply shortfall, national cabinet announced a target to build 1.2 million homes over five years, but it seems unlikely it will alleviate any pressure immediately, Powell says.

What could drive Australian property prices up in 2024:

1. Population: Unprecedented post-COVID migration and population growth will continue to send shock waves through the property market as a booming population looks for a place to live. It will continue to exert extraordinary upward price pressures on the property market, Powell says.
2. Supply: Given Australia’s slowing housing supply in the face of a bigger Australia, the extremes of a supply shortfall will exert upward pressures on the housing market.
3. Relaxed lending: Given high inflation and interest rates, there are calls to review the mortgage serviceability buffer (currently 3 per cent). If this buffer is reduced, it will speed up access to the property market for many by lifting borrowing capacity, increasing demand and resulting in swift upward price pressures on the housing market. This, together with the prospect of a cash rate cut in the latter half of 2024, would most likely signal a further gear change in property price, Powell says.

What that could push Australian property prices down in 2024:

1. Affordability: Stretched affordability could weaken prices, Powell says. Wage growth has lagged behind home prices for some time, and higher interest rates have hit borrowing capacity. This combination will slow demand and exert downward pressures on prices unless incomes rise or mortgage rates fall.
2. Rising unemployment: RBA expects unemployment to rise as inflation slows down. More unemployment will mean greater uncertainty, fewer loan approvals, delayed demand, and greater inequality in Australia.
3. Inflation: If inflation sticks around for longer, further rate rises, or high rates for longer, could push more mortgage holders into financial stress and listings higher, particularly from investors who are quicker to offload properties than an owner-occupier. Rising inflation will also cut affordability and limit buying power, reducing or limiting property demand, Powell says.

Property trends to watch in 2024

1. A cut in interest rates or other stimulus measures will spark demand
2. Urban spread and gentrification are on the rise as more people chase affordability
3. YIMBYs will replace NIMBYs to enable urban densification
4. Rental markets will reach a tipping point, with rent growth to slow