Property market shake-up coming as interest rate cuts loom

Likely rate cuts later this year are set to shake up Australia’s real estate market from coast to coast.

I’d like to wish everyone a happy new year and offer some insights as to what may happen in the property market in 2024.

First of all, it is clear that we are at or very near to the end of this rate-hiking cycle. With inflation falling from 8.4 per cent at its peak in December 2022 to 4.3 per cent in November 2023, many economists think another rate rise is unlikely.

In fact, there’s a real possibility of rate cuts toward the end of this year.

This is going to be important for the property market.

Since May 2022, the Reserve Bank has raised rates 13 times. The rate increases have impacted a huge amount of the population. High interest rates are a big challenge for the average buyer, and certainly for first home buyers. It’s not just about keeping up with repayments, it’s getting the finance in the first place. CoreLogic data shows the median home value rose by 8.1 per cent last year. That sort of strong growth is unusual while interest rates are going up.

There’s a real possibility of rate cuts toward the end of this year. Picture: Julian Andrews

Among the capital cities, Perth had the most growth at 15.2 per cent, followed by Brisbane at 13.1 per cent and Sydney at 11.1 per cent. In the regional markets, regional South Australia values rose by 9.4 per cent, Queensland went up 8.7 per cent and Western Australia rose by 8.4 per cent.

A lot of this growth was due to demand outweighing supply.

After a -5.3 per cent fall in the national median price in 2022, many homeowners preferred to stay put last year. Their aspirations to upsize were put on hold as interest rates and the cost of living continued to rise, so we saw fewer homes for sale. I think we would have seen fairly significant declines in the market if it wasn’t for the low level of listings.

Things might change in 2024.

Strong price growth tends to lead to more listings, as people gain confidence to sell. But average buyers are nervous with rates this high, and unemployment is expected to rise a bit, so we may see more of this impact in the market if supply levels normalise. In these circumstances, the market is more likely to hold steady than to repeat last year’s growth.

It’s a different story at the upper end.

Demand for prestige home is very strong and will likely continue to be.

Demand in the $5 million-plus sector has been very strong. There are no mortgages to speak of at this level. Purchasers are buying with cash, there is an enormous amount of wealth, and I have no doubt that part of the market will stay in demand.

Alongside high interest rates, the other pressing issue in the market today is a lack of new home builds. People in the property industry have been warning governments for years that we are not building enough homes. Too much red tape is delaying development and this has to change urgently.

CoreLogic reports that over the past six months, monthly dwelling approvals have averaged 13,760 per month, which is well below the decade average of 17,254 per month.

We’re seeing the impact not just in the sales market but also, very acutely, in the rental market. We need more rental supply and the last thing governments should be doing is making property investment harder for mum and dad investors with too many new state taxes and regulations.

Property guru John McGrath brings down the gavel on a sale in Sydney. Picture: Julian Andrews

A good level of property investment is a win-win for society.

For renters, continuous investment creates the ongoing rental supply we need to house our rising population. It also stabilises rents, with only sustainable increases over time that are more in line with inflation, and affordable due to incremental wages growth. For investors, the excellent long-term capital growth that property delivers often means they can self-fund their retirement, which benefits every single taxpayer by reducing demand for the age pension, thereby freeing up funds for other services. Win-win.

We are seeing more investors buying in markets further afield from where they live. If you’re interested in buying an investment this year and you’re looking for location inspiration, check out my top suburb picks in NSW, Queensland, Victoria, and Tasmania in the 2024 McGrath Report.

* John McGrath is the founder, Managing Director and Chief Executive Officer of McGrath Estate Agents

Originally published as Property market shake-up coming as interest rate cuts loom