Navigating the 2023 Property Market

NAVIGATING THE PROPERTY MARKET IN THE MIDST OF CONTINUED RATE RISES

Eight considerations to keep an eye on in 2023

As a significant number of borrowers approach the end of their fixed interest loan period, concerns have been raised about the potential impact on the mortgage market and property prices. Additionally, with a surge in demand due to migration, the possibility of a rental crisis has also been discussed. To gain a better understanding of these complex issues, please refer to the following analysis.

In early 2020, reports emerged of a novel virus, COVID-19, originating from China, causing widespread fear and speculation in the media. Predictions were made of a potential 30% drop in property prices and a major economic recession. However, as the year progressed, these forecasts proved to be incorrect. The property market experienced an unprecedented boom in early 2021, fuelled by pent-up demand and fear of missing out (FOMO) among buyers.

By January 2022, buyers had become more cautious, waiting for a natural correction to take place. The increase in capital gains caused by low interest rates was expected to be curtailed by anticipated rises in interest rates, aimed at controlling inflation.

In 2023, a multitude of factors will influence the property market. Here are eight key considerations to keep an eye on in the upcoming year.

1. INTEREST RATES

2. MORTGAGE PAIN

3. MIGRATION WAVE

4. RISING RENTS

5. BORROWING CAPACITY

6. INVESTORS COMING BACK

7. EXCHANGE RATES & EXPATS

8. REGIONAL REGRET

1. Interest Rates: As of the current date, the cash rate stands at 3.35%. The Reserve Bank of Australia has expressed its intention to bring inflation under control, and I predict that interest rates will reach a peak of 3.6% in the first or second quarter of the year, in line with NAB's forecast. As inflation begins to decline, the pace of this decline will dictate the level of interest rates necessary to stabilize the economy. I also anticipate two rate cuts in late fourth quarter or early 2024 to stimulate the economy.

2. Mortgage Pain: The effects of previous interest rate increases will become evident in consumers' finances between six to nine months after they were implemented. With the first interest rate increase taking place in May 2022, consumers can expect to feel the greatest impact in the second quarter of the year. As many borrowers transition from fixed interest loans of 2% to variable interest rates of 5.5% or higher, some may struggle with the increased repayments, but widespread mortgage defaults are unlikely. Some property owners may sell, while others will adjust their finances to accommodate the higher repayments.

3. Migration Wave: The large number of visa applications at the Home Office highlights the influx of migrants seeking to make Australia their home. I anticipate that the overseas migration cap of 195,000 may be lifted by 30,000 or more places, in addition to the temporary visa holders coming to Australia for several years at a time. The country is in need of skilled workers across various industries to remain competitive globally, and the volume of migrants will place additional strain on the limited rental housing available.

4. Rising Rents: In 2022, we witnessed an average national rental increase of over 10%. Given the shortage of rental properties, we can expect to see an additional increase of 5% to 7% in 2023. This is good news for landlords but may pose a challenge for tenants who will need to budget for the increased rent. Decreased building approvals due to increased construction and funding costs will further worsen the rental crisis.

5. Borrowing Capacity: The rapid rise in interest rates has reduced borrowing capacity by 22% on average in the past year, and any further increases will continue to diminish this capacity. This immediately affects the property market, limiting buyers' ability to pay higher prices. It is unlikely that we will see many auction records set in the coming year.

6. Investors Returning: I anticipate that a reasonable number of property investors will enter the market in 2023, seeking strong yield properties and capital gain opportunities after the latest correction.

7. Exchange Rates and Expats: With the Australian dollar declining by 10% over the past year and property prices reducing by 10% to 15% or more, these conditions make it an attractive time for expats and foreign buyers to consider securing Australian property. As Australian interest rates are expected to remain lower compared to other advanced economies, this will put downward pressure on the Australian dollar and make the exchange rate conversion attractive for expat buyers.

8. Regional Regret: A survey of over 5,000 people conducted by Real Insurance and CoreData research group found that 58% of those who moved to country or coastal locations away from major cities regret their move and are planning to return to the city, with 35% already moving and 23% within the next two years. This will impact both regional and city locations, with continued migration to the Southeast Queensland areas of Gold Coast, Brisbane, and Sunshine Coast expected to remain strong.