Australian property investment in 2023 and what could be in store for 2024

Just about everyone got property wrong in 2023 — here’s what investors should know entering the new year.

Just about everyone got property wrong in 2023. Forecast to decline through the year, the residential market turned the corner mid-year and prices lifted almost 10 per cent by Christmas.

For 2024, the forecasters are suggesting we can expect price rises of between 3 and 5 per cent across the board.

But, should you believe them?

Forget the headlines about those exceptional properties that sell far beyond the seller’s expectations — forget too the doom and gloom around how property is already too expensive.

All that matters for investors are the numbers. Clearance rates could stay on the low side if more sellers are enticed into the market, while interest rates remain higher than many might have expected.

Nevertheless, it is difficult to construct the argument prices will slide in 2024. For a start 500,000 new people have arrived into the country in a 12 month period — and they all need somewhere to stay. Vacancy rates are at rock bottom and the building approval rate is still far behind where it needs to be.

Put simply, the fundamentals are in place to keep the market buoyant in the next 12 months.

Here’s what you need to know:

Rates versus rental yield
The property market is different in every state but we all pay the same interest rates set by the RBA.

Officially, the average rental yield nationwide is around 4 per cent in residential property, but the reality in some capital cities is closer to 2 or 3 per cent, while regional towns can be closer to between 5 and 7 per cent.

As a result, this year we can expect to see more people investing interstate to take advantage of serious differentials in different markets.

However, rental income may stop growing. In 2022, rental yields rose dramatically by double digits across many cities, in 2023, they moderated but kept rising by around 8 per cent. In 2024, the outlook says rents will flatten.

However, as Eliza Owen from CoreLogic suggests: “Unfortunately for renters, a slowdown in the rate of rent increases does not necessarily mean rents will fall”.

Crucial for investors is whether we have seen the top of the interest rate cycle. Many economists expect rates will start to drop in the second half of next year.

But, if we have learnt one thing from 2023 it is projections of a turnaround in interest rates have been premature for a long time.

In other words, the sums remain precarious — even assuming a 4 per cent improvement in price and a 4 per cent yield (before expenses). 8 per cent total with an interest bill of up to 7 per cent leaves very little wriggle room.

Of course there is negative gearing which has its advantages when rates are high, but the story remains the same — for most investors the returns which matter from property must come from capital appreciation over time. The hard numbers are currently far from compelling.

Bargain Towns?
Where are the bargains? The most promising set of circumstances are surely in Melbourne, where the city has been dragging behind the rest of the national market all year.

Ironically, Melbourne is the city where most immigrants arrive to work and the rental market is as tight as anywhere else with vacancy rates between 1 and 2 per cent.

Yet Melbourne could only muster a 12 month increase of 3.4 per cent — less than half the national average increase.

We are talking here about a city which is about to become the biggest urban centre in the country. The Federal Treasury’s Centre for Population predicts the population will top 6.1 million by 2033.

Meanwhile, the city of Perth has already had a strong lift, with the best numbers of 2022 with a lift of 14.5 per cent –—and there is every chance the WA capital still has years of above-average growth in front of it after a long period of sub-par returns.

The other bargain towns may well be scattered throughout the ‘sea change’ and ‘tree change’ favourites which went for a run during the Covid lockdowns and are now suffering something of a hangover.

The standout examples of such towns are along Victoria’s Mornington Peninsula, where prices jumped in Covid then dropped and have yet to stabilise.

Sure, it is expensive, but this coastal holiday home district remains within striking distance of Melbourne.

Investors face off
The combination of a seriously negative outlook coupled with 13 rate rises literally petrified the investment property market until very recently. But there is nothing like climbing prices and strong rental conditions to lure people back into the market.

The overall numbers of investors active in the market remains below average.

Analysts will tell you there are still more sellers than buyers in the investment sector — but the numbers are changing quickly.

CBA, the nation’s biggest lender said: “Total new lending has been rising since March this year and monthly gains have been strong from August to October, a period when the RBA has been on hold. Over the year to October, new credit for investors is 12.1% higher and owner occupier lending is up 1.4 per cent.”

Inside those numbers there are remarkable variations, with investment lending in Perth up 42 per cent, while for Melbourne it is up 3 per cent.

But the point is clear — investors are back.

Immigration
The arrival of 563,205 people into the country in the 12 months to March this year is the outstanding factor underpinning the property market for the immediate future.

As Proptrack’s Cameron Kusher put it, it “is just shy of the population of Tasmania being added to the country in one year. More up-to-date indicators from overseas arrivals and departures data show little evidence of a slowdown”.

“The impact of rapid population growth has largely been felt in major capital city rental markets but is also contributing more broadly to strong overall demand for housing.”

Earlier this month, Prime Minister Anthony Albanese announced a plan to bring migration back to sustainable, normal levels.

The mid year economic update forecast Australia’s immigration intake would begin to slow this financial year while ultimately dropping to around 235,000 in FY26.

For investors this means the period where virtually anything anywhere could be rented will be coming to an end. In turn, this will gradually revive the biggest concern for most property investors — the risk of vacant property.

Regulatory Risk
From the federal ambitions of the Greens to freeze rents in the market to new state-based taxes, so called ‘regulatory risk’ remains an outstanding –—and difficult to quantify — risk for property investors.

In recent times, the Queensland government had threatened a land tax which would have taxed investors in other states who held property in Queensland.

The idea never got off the ground.

Then earlier this year the Victorian government launched a batch of new taxes covering property development windfalls and short-term rentals.

Then with little warning it followed these state budget changes with a second round of taxes, where a vacant residential land tax was widened from the inner-areas of Melbourne to include the entire state, as well as holiday homes.

By the end of the year Victoria could claim the weakest property performance across the nation as well as the slowest lending investment growth.

That’s regulatory risk right there, keep an eye out for more of it in 2024.

Originally published as Australian property investment in 2023 and what could be in store for 2024