The RBA has raised rates again, so what can we expect for the rest of the year?

A lot has changed in housing markets since the COVID-19 pandemic-era boom. National property prices increased by 34.7 per cent from March 2020 to their recent peak in March 2022. In 2021 alone, prices surged by 23 per cent, the third fastest year of price growth in 140 years.

Clearly, that was not going to be repeated in 2022. And with the RBA raising interest rates at the fastest pace in at least three decades, it’s no surprise that home prices are now falling.

Prices nationally have fallen 4.5 per cent since their March 2022 peak, according to the PropTrack Home Price Index.

That’s a substantial fall – though, to date at least, it is yet to exceed the 5.3 per cent fall in the 2018-19 downturn, or the 4.6 per cent decline accompanying the 2008-09 Global Financial Crisis (GFC).

But the current downturn will likely exceed those previous falls and become the largest peak-to-trough decline in recent decades.

We expect that prices nationally will decline by a further seven-to-10 per cent by the end of 2023. 

The main driver of our forecasts is the fact that interest rates began to rise much sooner than expected, and the resulting reduction in borrowing capacity. The sharp increase in mortgage rates has reduced capacity for new borrowers by around a quarter.

We are expecting an additional one or two 25 basis point increases in the cash rate following today’s increase, which will further reduce borrowing capacity. To date, prices are yet to fully reflect the impact of this decline, which is why we expect further price falls this year.

With many households set to roll off fixed mortgages this year – as many as one in five of all mortgages will come off a fixed rate in 2023 – the market for refinancing will get even busier. In the past year alone, external refinancing – where a customer refinances with a new bank – by owner-occupiers has surged by 27 per cent.

Why rental markets are very tight

While house price falls continue to grab headlines, the biggest story in housing this year will likely be in rental markets, which are extremely tight across the country. Rental vacancy rates are sitting in the order of one to two per cent across nearly all of the country. Nationally, the vacancy rate sat at 1.6 per cent in January – about half of what it was pre-pandemic.

This is partly because many investors sold their rental properties in 2020 and 2021. That reduced the size of the rental stock. But that isn’t the whole picture, because some of those investors sold to the many first-home buyers who purchased in 2020 and 2021. To the extent that those first-home buyers purchased ex-rental properties, that would offset the fall in the number of rental properties on the market.

Instead, the big shift that took place during the pandemic was that renter households shrank. Renters moved out of larger share houses and into smaller one- or two-person households. That means more properties are needed to house renters – on our estimates, approximately an additional 95,000 properties.

That extra household formation contributed to the tightening of rental markets in 2021 and 2022.

But there’s another factor now adding to demand: migration has returned after a hiatus during the pandemic. We’re seeing the impact of that on realestate.com.au. The number of overseas searches for rentals is up 65 per cent compared to a year ago, and up 20 per cent compared with before the pandemic.

Most of that demand will be heading for inner-city areas, in particular Melbourne and Sydney. Recent migrants are much more likely to live in inner-city areas, with overseas searchers looking at these suburbs on realestate.com.au and Census data reflecting this trend.

Low vacancy rates and competitive conditions have seen rents grow quickly. And with markets likely to remain tight amid strong rental demand, they are likely to continue doing so. Over the past year, median advertised rents on realestate.com.au grew by 6.7 per cent.

Investors are now starting to return – they’re back to around one-third of all new mortgage lending, after falling to as little as a quarter during the pandemic. And new additions to the rental stock are now outstripping investor sales, meaning the total number of rental properties is growing again.

Property prices will continue to dominate the discussion this year, but context is important – prices surged through 2021, and with mortgage rates now substantially higher, some correction is needed to keep housing affordable for new buyers.

For policymakers, the focus for 2023 must be on supply. That will be particularly important to reduce competition in the rental market. Ensuring we build enough homes is also key to ensuring all Australians can keep a roof over their heads.