Australia Property Market Analysis - Should you buy now or wait?
As investors in Australia plan their real estate strategy, the road ahead is fraught with uncertainty. Inflation is high, and the Reserve Bank of Australia (RBA) has hiked the cash rates, resulting in a fluid situation in the Australia Property market.
Overall Australian capital dwelling prices decreased by 0.8% in June 2022 and 8.8% higher year on year.
Let's take a deeper dive into the real estate trends so that you can make an informed decision about buying, selling, constructing, renovating or renting properties in Australia.
What you need to know before investing in Australian property
Australia experienced a real estate market boom in 2021, seeing huge value gains due to low-interest rates and a shortage of homes.
In the year leading up to November 2021, home values climbed to 22.2%. The estimated value of residential real estate reached a record high of 9.4 trillion dollars in just twelve months.
Initiatives by the Australian Government
Due to the HomeBuilder scheme, many homes in Australia are under construction – buyers are opting for detached housing.
The Australian Government launched several initiatives, including HomeBuilder, to boost consumer confidence in the building industry and encourage consumers to move through with purchases or renovations that may have been put off because of COVID-19.
All supporting documentation must be submitted to the relevant State or Territory Revenue Office by 30 April 2023.
On 17 April 2021, the Government extended the construction commencement requirement from 6 months to 18 months for all applications.
In regional markets in 2021, housing prices rose twice as fast as in their capital city counterparts. Large coastal centers closer to capital cities attracted most movers from metros.
The current state of the Australian Property Market
The Emerging Trends in Real Estate annual report 2022 reveals Australia's commercial property markets demonstrated surprising resilience throughout 2021, with investment volumes rebounding sharply in the first three quarters to USD$24.8 billion - up 106% on the previous year 21% higher than 2015-2019 average.
Greater Sydney (33%), Greater Melbourne (31%) and Greater Adelaide (30%) performed above the national average (23%) when it came to year-on-year capital growth value for the Australian large-format retail real estate investments.
Highlights of the report:
- Competition for real estate assets remained high, with CBD trading at high prices due to the weight of capital, low-interest rates and prices in Australia. Investor interest in newer, high-quality CBD offices was strong. CBD means Central Business District, the city centre.
- Cap rates for prime properties have either held firm or continued to compress to previously unheard-of levels. Cap rates are a representation of the yield one receives on an investment. For those that follow the stock market, the capitalisation rate is the CRE equivalent to a dividend yield on a stock, which tells you the percentage of a company's share price that it pays out in dividends each year. Cap rates generally range from 2%-10%, with 2% rates generating the lowest yields and 10% rates the highest.
- Transaction volumes in the logistics sector during the year's first three quarters were more than double the five-year average.
But the property prices reached a flatline in the second half of 2022, with further falls expected in 2023. Sydney prices dropped -1.5% in June and are up 6.5% over the last 12 months. Melbourne dropped -1.0% in June and is up 3.5% over the last 12 months.
Brisbane prices increased 0.2% in June and 26.1% over the last year. Brisbane recently suffered from devastating floods, but it remains the hot spot. Brisbane's housing markets are likely to perform strongly in 2022.
Australia Real estate trends in 2023
Some trends experts say are likely in 2023:
1. Increase in rent
Australia's cost of living crisis is worsening with rents increasing in both big cities and the country.
The April Domain Rental Report, just before the bank cash rate hike, revealed that prices had hit a record high with the most robust annual growth in 13 years.
- With its new high of $500 a week, Brisbane is far from being the only city where tenants are hurting, too. House rents have surged even more strongly in Canberra at 16.7% to the highest national weekly median rent of $700. In Perth, it has jumped to 11.6% to $480 a week, in Darwin 10.9% to $610, in Sydney 9.1% to $600, in Hobart 8.3% to $520, in Melbourne 3.4% to $450 and in Adelaide 9.4% to $465.
- Unit rents aren't offering much solace. The highest rise is in Darwin, up by 16.3% to $500 a week. Adelaide 8.6% to $380, Perth 8.1% to $400, Canberra 8% to $540, Brisbane 7.5% to $430, Hobart 7.1% to $450, Sydney 6.4% to $500 and Melbourne 4% to $390.
2. Self-Managed Super Fund (SMSF) used to buy real estate
Self-managed super funds (SMSFs) are a way to save for retirement. Unlike other funds, the members of an SMSF are usually also the trustees. The members of the SMSF run it for their benefit and are responsible for complying with the super and tax laws.
3. The right neighbourhood gets a premium
COVID appealed to more people to have a property in a "good" neighbourhood. People with plush funds are ready to pay a premium to live and work within a 20-minute walk, drive, or ride from home. They also look for nearby education, community, sporting, shopping, and recreational facilities.
4. Coastal and regional areas preferred
Regional and coastal regions will grow as Australians opt for flexible work and retirement plans. It will create more jobs in such areas. The pandemic has boosted the trend of trying to retire earlier through investing or downsizing. It is expected to continue at higher levels than in the past.
Throughout 2021, tenants grew interested in coastal and regional locations, thus hiking competition and prices. Remote working trends are here to stay.
5. Buying beyond borders
Fresh real estate investors are looking beyond capital cities to make a profit. COVID has accelerated virtual buying.
The volume of enquiries from buyers fell by 21.6%. But, interest from investors and first home buyers rose. Due to price hikes, many first-time home buyers have been kept out of the real estate market.
So, what about plush Australian real estate?
When borders were closed due to COVID, real estate sales to global buyers slowed down. It was expected that the luxury real estate market would grow in 2022 as travel restrictions ease and expats return to Australia.
But this didn't happen because of the Ukraine aftershocks, rising inflation and the RBA cash rate hike.
The roadblock for foreign buyers is the restrictions set by the Australian Foreign Investment Review Board. It allows non-residents to purchase only apartments in new developments.
But, foreign buyers who move permanently to Australia can get approval from the Board to buy real estate in which they have previously lived.
But the crisis was about to happen.'
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Golden rules to buy property in Australia
In December 2021, Commonwealth Bank of Australia's Head of Australian Economics, Gareth Aird, described the Australian housing market as "the twilight of an incredible boom that record-low mortgage rates have fueled".
The banks and the economists never had an excellent track record of predicting. You have to devise a strategy yourself. People have bought in booms, busts and flat times. Real estate markets, especially median prices around Australia's major capital cities, have consistently risen in value.
Hence, the golden rule for your strategy should be to buy when:
- The bank will give you a mortgage
- You can buy at a conservative valuation price and
- You have enough cash buffer to get you through the next few years
There will be price corrections after bull runs.
For the property investors, the formula is straightforward:
- Buy the right asset,
- Correctly finance it,
- Enter when your cash flow allows and holds for the long term.
It's not unusual for a 10% drop to be represented by a 10% fall in the upper third of the property market, a 5% fall in the mid-range market and a 10% price growth in the affordable markets of one city.
The net result is an across-the-board fall of 10%, and yet some investment properties in that market may have grown during the given period.
Should you wait till 2023 to buy a property in Australia?
The answer depends on the location. With high-end and mid-range property seeing a drop in property values, affordable real estate markets in city suburbs and more prominent regions will hold their own and likely grow in value well into 2023.
The strategy is to understand the fundamentals well enough to pick those markets. Pick areas with a growing population, where infrastructure, the family demographic, job growth and diversifying industry create demand for affordable real estate.
Is now an excellent time to buy an investment property?
According to CoreLogic, Sydney and Melbourne have seen a dip in the daily home value index. Perth, Adelaide, Darwin, and Brisbane appear to be moderately impacted. It could signal price drops in capital cities and other areas.
Lenders are tightening their lending standards for home loans. NAB announced that buyers could no longer borrow their annual income more than eight times (previously nine), and ANZ is cutting back to 7.5 times.
What does this mean to first-time buyers?
No sizable fall in the next couple of years
Australia now has the highest prices in the world relative to incomes. Where house prices have gone up nearly 30% in the last two years, the price fall so far is relatively mild.
It is mainly because of the RBA low-interest-rate policies pursued by the Reserve Bank of Australia then and the massive COVID stimulus into the economy towards a trillion dollars, with the debt of the states climbing to half a trillion.
In a recession, fewer properties come onto the real estate market, which triggers price falls.
The prices will not fall much. But vacancy rates are at an all-time low of around 1%. It's hard for people to get rentals. There will not be a massive increase in housing supply due to land restrictions.
So, we may not see sizable falls in the next few years.
Buy, if you are confident and have Finances Ready
If you have accumulated considerable financial reserves during COVID and feel confident, you may see some modest price reductions as interest rates climb in the next few months.
It could improve the real estate market for you to make the purchase. The strategy to invest in real estate is, don't rush.
For first-time homebuyers, there are offers from the new Government, like the Help to Buy shared equity scheme, where the Government is a co-owner of your property. But if you are really on the brink, you are better off staying in a rented home.
The Government needs to make a lot more land available because subsidised schemes for new homeowners will push up prices further.
There is no imminent threat to the boom
It is because there are very few mortgage defaults in Australia.
But there will be a correction to massive price hikes in areas where they have gone up more than the real estate market can support.
Property values may remain the same in areas like Sydney's eastern suburbs as properties are withdrawn from the real estate market. The same will be the case along the coast.
Be cautious about entering the real estate market to buy your first house in a recession. That is key to the strategy.