Six pressing issues for the property market in 2023

Following strong housing market conditions during 2020 and 2021, 2022 has been a tumultuous year for the housing market. Interest rates have risen rapidly, resulting in price falls and a reduction in sales volumes.

While prices for properties for sale have fallen, rental prices have grown on the back of escalating demand from overseas migration and fewer first-home buyers. The insufficient supply of rental stock has afforded landlords the scope to lift rents.

With market conditions changing so rapidly, what are the six most pressing issues for the housing market in 2023?

When will interest rates stop rising?

After interest rates had spent the past 11 years doing nothing but getting lower, inflation finally re-emerged in 2022, leading to rapid increases in interest rates.

The RBA has raised interest rates every month since May 2022. Source: Getty Images.

The cash rate was 0.1% at the start of May 2022 when the RBA decided to lift interest rates by 25 basis points. Between May 2022 and December 2022, official interest rates have climbed 300 basis points.

Looking ahead to 2023, we expect that interest rates will initially continue to climb but it seems likely that somewhere between February and May the RBA will pause its hikes.

Research shows that changes to interest rates take between one and two years to fully impact the market. We’ve had many rate hikes in a short period of time so we expect that we are close to the end of the rate hike cycle, but the impact from previous rate rises will be felt well into 2023.

Will property prices stop falling throughout the year?

When we consider how quickly interest rates have increased and how much borrowing capacities have reduced as a result, the decline in prices has been fairly moderate to date.

Property prices will continue to decline throughout 2023. Source: Getty Images.

The change in prices seen throughout the pandemic was one of the strongest periods of property price growth on record, so it makes sense we’re now seeing some of those gains reversed.

We expect that property prices will continue to decline throughout 2023 on the back of additional interest rate increases, further reductions in borrowing capacity, and a slowing of the overall economic environment.

If interest rates were to fall in 2023, the outlook for property prices would change. However, we see this as unlikely, and if interest rates were to fall, it would likely happen late in the year.

Will buyer and seller confidence return to the market?

The latest Westpac-Melbourne Institute consumer sentiment index has sentiment at 78 points, well below the 100-point mark where optimists and pessimists are aligned. Consumer sentiment has been trending lower ever since interest rates started to rise and is sitting at historic lows.

What's in store for the property market in 2023?

While this indicates concern from consumers, consumer behaviour is yet to reflect this, except for within the housing market where transaction volumes have been trending lower all year.

Consumer sentiment is low because interest rates are increasing each month and it’s unclear when this will end, which is weighing heavily on seller and buyer confidence.

While our expectation is that interest rates will stop lifting early in 2023, it’s unlikely this will result in sentiment rebounding substantially. Though it will give buyers and sellers more certainty and we expect transaction volumes will start increasing.

Will other states follow NSW’s lead and give first-home buyers the option to pay stamp duty or land tax?

Late in 2022, the NSW state government passed legislation that allowed first-home buyers purchasing a property under $1.5 million to choose between paying stamp duty upfront or an annual land tax.

The NSW state government passed legislation to help first-home buyers purchase a property. Source: Getty Images.

We anticipate that the majority of buyers will choose the land tax option. It will end up being cheaper unless they hold the property for more than 20 years. Since most first-time buyers aren’t purchasing their forever homes, this is unlikely.

It’s still very early days, so we don’t know how much more activity this policy will generate but it significantly reduces the upfront cost for a first-time buyer and will allow them to enter into home ownership sooner.

While it is typically much cheaper for first-home buyers to be renting than paying off a mortgage, the policy may lead to a lift in property transactions. We expect other states will consider similar policies, though any introduction of this policy outside of NSW is likely more of a prospect for 2024 or beyond.

How much higher will rents climb over the coming year?

Over the past year we have seen a rapid escalation in rents due to strong demand and limited supply. Surging demand is being driven by low volumes of first-home buyer purchasing and the ramp-up in migration, while reduced supply is due to fewer investor purchases and heightened selling from investors.

How will the rental market fare in 2023?

We’ve also seen the strength in rental demand shift from the regional areas that were so popular during the early part of the pandemic back to the major capital cities as they come back to life.

In the overseas migration hotspots of Sydney and Melbourne, inner city unit rents are either cheaper or only marginally higher than they were at the start of the pandemic.

With demand for inner city rentals expected to rise further over the coming year, we expect rents will continue to see larger increases.

Will we see a meaningful increase in rental stock?

The ongoing lack of supply is expected to result in further increases in the cost of renting. Source: Getty Images.

With the share of new lending to investors continuing to slide and higher interest rates greatly reducing the capacity for borrowers to access an additional mortgage, it seems unlikely there will be a significant change in rental supply in 2023.

More build-to-rent projects are in the pipeline and projects already under construction will be completed. However, the volume of stock in build-to-rent projects or purchased by investors in new build-to-sell projects appears insufficient to cater to the rebound in demand for rentals from domestic sources and the ongoing lift in demand from overseas migrants.

Unfortunately for renters, the ongoing lack of supply is expected to result in further increases in the cost of renting.