What could Australia's property market look like in 2023?

Although most forecasts suggest that the Australian property market is likely to experience significant price falls through 2023, there’s evidence to suggest that the outcome won’t be as damaging as it might seem.

Digital valuation platform PropTrack released its latest Property Market Outlook Report this week, predicting that homes in capital cities will see a sharp downturn in values, between 7 and 10 per cent, by the end of the year.

Projections for dwelling prices across capital cities:

Source: PropTrack Property Market Outlook Report February 2023.

Nationally, property prices fell 2.3 percent in 2022 and are anticipated to decline up to a further 10 per cent by December 2023.

Despite a severe lack of market supply and skyrocketing rental costs, PropTrack’s report suggests that “renting remains significantly cheaper than repaying a mortgage in most areas of the country”.

When can we expect prices to hit the bottom?

CoreLogic’s Daily Home Value Index (HVI) hit a record decline of -8.40 per cent after the first week of January 2023. This broke the previous record in peak-to-trough declines, when home values sank -8.38 per cent between October 2017 and June 2019. 

While the 2017-2019 downturn took 20 months to unfold, the record-breaking price falls off 2022-2023 occurred in under nine months. In early January, the AFR estimated that the Australian housing market would encounter its worst cumulative loss in 42 years within two to three months.

The latest data revealed that CoreLogic’s HVI fell a further -1.0 per cent in January, although this was the smallest month-on-month decline since June last year. This may indicate that some of the momentum has left the housing downturn, according to CoreLogic Research Director Tim Lawless.

“The quarterly trend in housing values is clearly pointing to a reduction in the pace of decline across most regions, however at -1.0 per cent over the month and -3.2 per cent over the rolling quarter, national housing values are still falling quite rapidly compared to previous downturns,” he said.

As the fog of record-low interest rates dissipates and the fixed-rate mortgage cliff threatens, some borrowers may find it difficult to refinance with a new lender if their serviceability credentials are stifled by reduced equity and potential changes to macroprudential policies.

The report said, “Those on variable mortgage rates and those ending fixed terms will incur higher mortgage interest costs and will need to dedicate a greater share of their income to housing, and less towards discretionary spending."

Fears of a recession are mounting

Australia, like most of the rest of the world, seems destined to encounter some form of economic hardship and a spell of weak growth. Substantiating whether or not Australia will experience a recession will come down to a number of factors, including the way in which the term is defined.

If a recession does transpire it may lead to interest rates cuts, which would provide some relief to mortgage holders. However, it may also result in higher unemployment and a greater potential for borrowers to default on repayments. 

It’s worth getting your finances in check ahead of time to prevent any major complications and ride out the storm.

Where’s the anomaly?

Cameron Kusher, Director of Economic Research at PropTrack, speculates that the Reserve Bank of Australia (RBA) will hike the cash rate another 50 basis points to 3.6 per cent in the next few months, but no higher.  

“Aggressive interest rate hikes designed to combat surging inflation have driven shifting housing market conditions, and price falls are likely to continue and accelerate in 2023,” he said.

“Since the peak in March 2022, national property prices have fallen 4.3 per cent. So, a fall of up to 10 per cent this year would result in cumulative declines of close to 15 per cent.”

However, Kusher stipulates that even if Australian home values were to decrease at the highest range of the forecast, prices will still remain 18 per cent higher than they were prior to the global pandemic.

“National property prices increased by 34.7 per cent from the start of the pandemic in March 2020 to their recent peak in March 2022 - one of the fastest periods of price growth on record,” Kusher said.

The report also found that, on average, homeowners have a two year headstart on their mortgages and possess significant equity in their properties due to the pandemic price growth. Low unemployment and reported wages growth would also help to offset price falls.

What can you do to improve your situation?

The best actions to take in response to potential changes to lending rules, rising interest rates and declining property values will depend on your household’s financial position and your personal objectives. Consider these general tips:

• Ascertain your home’s equity - get a free property report to estimate your current home value
• Compare a range of different home loans if you’re eligible to refinance
• Consider making extra repayments and/or using offset accounts to build mortgage buffers
• Check your credit score to see where you stand
• Consider contacting a mortgage broker for advice that’s more specific to your financial situation

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