The 2023 Sydney Housing Market Reviewed

Core Logic have Sydney house prices up 12.5% for the year and apartments up 8.1%.

These price increases all but wiped out the price declines of 2022 with the market now hovering around ‘all time highs’.

Few, if any predicted such an outcome at the beginning of 2023. The Mortgage Cliff was predicted to wreak havoc on property markets across the country.

The Mortgage Cliff went from being the most talked about issue in the housing market to the least discussed.The market crunch that many predicted simply did not eventuate.

The gains in the first and final quarter of the year were somewhat tempered, with the most significant price gains being achieved between Easter and Spring.

Low stock levels and a sense that interest rates were peaking saw buyer demand outstrip seller supply during the middle of the year.

Agents unexpectedly went from handling an excess of listings to suddenly having tight supply – with packed Open Houses as buyers competed for the available listings.

We breakdown the factors that resulted in 2023 being the year it was in residential property.

Robust economy

Higher interest rates and mortgage repayments are easier to deal with if one’s employment is stable, and the economy is performing well.

Whilst cost of living pressure really became an issue in the second half the year, it is fair to say the issue did not play a role in the property market.

The unemployment rate remains below 4%, many people have been able achieve a pay rise, secure a better paying job and/or sell assets to reduce debt levels.

All these factors combined to ensure distress selling did not take hold in the property market.

The RBA have endured their fair share of criticism, to the point that now former Governor Philip Lowe was moved on during the year.

The RBA does deserve some credit in that they have been able to reduce inflation from nearly 8% to below 5% in a short time frame, with higher interest rates – and still ensure the economy is ticking over.

Rental crisis

The Government absolutely flooded the country with immigration in 2023. Reports

have it that Australia’s population grew by over 550,000 in the past 12 months.

This created economic activity and ensured the Government’s books looked good, yet it created severe pressure points too.

The most notable pressure point in Australia today is clearly affordable housing.

The Sydney rental market rose 15% in 2023, with SQM Research predicting a further 10-15% in 2024. There is much debate in the political arena about housing supply.

The reality facing Governments is there is neither a quick nor affordable way to increase housing supply in Sydney – let alone agreement on where this additional supply will be located.

Therefore, there is little doubt that Sydney rents will increase all the way into 2025 on the current trajectory.

The strong rental market and the price gains achieved in the sales market offered those suffering mortgage stress, options – they could sell into a rising market or lease their property out.

Whilst neither option may have been their preferred option, it still beats being forced to sell in a falling market.

Offshore buying

At various stages throughout the year, the AUD fell sharply, making Australian real estate cheaper for those earning in better performing currencies.

The Dollar peaked at USD $0.7151 in January 2023, it bottomed out at USD $0.6288 in October 2023, representing a 12% decline, peak to trough.

This combined with the many other benefits that come with owning quality

Australian real estate saw offshore buying increase.

All year, agents have seen steady demand from offshore buyers.

Whether they were overseas investors, Ex Pats taking advantage of the weak currency, people permanently moving to Australia – cashed up with GBP or USD, the reality is a lot of offshore money made its way into Australian real estate this year.

Agents operating in the prestige markets in Melbourne openly spoke to the media of the multimillion dollar property sales being made to wealthy Chinese buyers.

The average closing price of the AUD vs the USD for 2023 is $0.66. The last time it was this low for the year was in 2003 when it ended the year with an average closing price of USD $0.65.

Given the AUD has displayed systemic weakness at a time over 550,000 skilled migrants have moved to Australia, is it any wonder offshore buying was rampant throughout 2023?

Investors bailing

Australians love real estate and investing in real estate.

Many landlords who faced sharply increased mortgage costs in the past 12-18 months have been selling their investment properties as a sensible means of reducing personal debt levels.

In most cases, the purchaser of the investment property is an investor, hence the rental pool has been steadily shrinking at a time it needs to be increasing.

It is not to say there are not ‘Buy and Hold’ investors active in the market, there are and always will be.

However, there is little doubt that investors selling, comfortably outnumber investors buying in.

Increasing property prices, rising mortgage costs, aggressive Land Tax obligations on housing and rising strata levies on apartments mean that many incoming property investors are happy to stay parked on the sidelines for the time being.

Interest rate cycle is peaking

With the Cash Rate at 4.35%, we may be at the peak rate now, or there may be 1 or 2 to go. Only time will tell from here.

As the RBA continually remind us, its ‘data dependent’. Once the RBA started increasing the Cash Rate in May 2022, they increased it consistently every month they met, until April 2023, when they skipped hiking that month.

The market breathed a sigh of relief, although it was only temporary.

The RBA then increased again in May and June 2023, at which point there was widespread community angst about the RBA’s gameplan.

With inflation coming down, the sense we are close to Peak Rate for this cycle has been reassuring to many in the market.

Earlier in the cycle when rates were increasing more rapidly than has ever occurred in many people’s working lifetime, it was much more difficult to assess where peak rate was at.

Now that Peak Rate is in sight, many households are better positioned to model their financial affairs and implement a gameplan.

There is little doubt that household’s savings and wealth acted as a buffer during the rate cycle.

Late in the cycle, the market become very sensitive to the hikes – agents felt a noticeable impact from the last two hikes in June and November 2023 respectively.

The difference being after the June hike - new listings increased sharply, whereas after November’s increase - buyer enquiry fell.

Negative Real Interest Rates

Are the final piece in the jigsaw puzzle when it comes to understanding what drove the property market this year.

As per the RBA website, Real Interest Rates are defined as “the cost of borrowing money (i.e., the nominal interest rate) net of inflation. It takes account of the fact that part of the nominal interest that borrowers pay to lenders represents compensation for anticipated inflation.

The remaining component better reflects the economic cost of borrowing and the return to lending”.

The inflation rate in Australia has been running above the RBA Cash Rate and therefore retail bank’s Mortgage Rate, for much of the past 18 months.

Whilst interest rates have been rising, inflation has been eroding their impact due to the Real Interest Rate being negative.

If ones borrowing costs go up 15% yet inflationary forces in the economy sees them earning an additional 20%, the inflationary outbreak is of less concern to that person.

There are many adjectives we could use to describe the residential market in 2023, but we will settle on fascinating.

It was fascinating if not bewildering watching so many dynamic factors pulling the market in different directions.

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