Why residential property is set to lure shell-shocked share market investors

A price turnaround and the prospect of accelerated rate cuts puts residential property back in favour as share markets turn sharply negative.

Investors are expected to pile into the property market as share markets tank.

As share markets plunge, a perfectly timed turnaround in the Australian residential market is set to lure investors back to the perceived defensive qualities of “bricks and mortar”.

In fact, investors have already been moving quickly, with investment lending in the housing sector springing back to life in recent months.

Annual investment lending growth in residential property is already moving at its fastest pace since 2022.

Forecasts of solid price gains and steady investment yields distinguish residential property from the wild volatility now engulfing share prices.

But the strongest driver of the residential sector is the expectation that interest rate cuts will now be accelerated due to the tariff troubles.

The Reserve Bank delivered the first-rate cut in the current cycle in February – and the change in direction prompted an immediate uptick in property prices, with residential values showing nationwide improvement in both February and March after months of mixed returns.

In recent weeks, sentiment across the market has further improved as clearance rates lifted back to healthy levels of around 70 per cent.

Meanwhile, prices continue to lift at a modest but steady pace. Nationwide residential property prices are up 3.4 per cent over the last 12 months.

Auctioneer Scott Kennedy Green at a property sale in Paddington.

CoreLogic reported earlier this month, “Australian property values reached new heights in March – values increased 0.4 per cent over the month, while rental values are also at record highs”.

For indebted homeowners, rate cuts mean the mortgage becomes easier to pay. But for investors, the numbers change dramatically. “We’ve seen it again and again, when sharemarkets drop, many investors will swing towards property,” says adviser Stuart Wemyss of Prosolution Private Clients.

Consensus forecasts for the residential market at the start of this calendar year were for prices to rise by up to 4 per cent and yields (before expenses) to run between 3 per cent and 6 per cent (lower in cities, higher in regions).

If mortgage rates drop from near 6 per cent closer to 5 per cent — which is now expected off the back of official rate predictions of 3.6 per cent by the end of this year (down from 4.1 per cent now) – the defensive qualities of property could become very evident.

As dwelling values lifted across the board in recent months, investors activity has bounced. Total investor housing credit reached $768bn at the end of February – a 5.6 per cent lift over the year – in the fastest growth recorded for the sector since November 2022.

The issue for property investors is whether a potential swing away from the sharemarket will be sustained. The last time the residential market moved significantly higher as sharemarkets fell was during the Covid crisis, however that lift was primarily underpinned by owner-occupiers seeking more living space.

Investors will also be concerned over the supply of existing stock. As real estate analyst Cameron Kusher warns: “The main challenge remains clearing the heightened volume of stock for sale, which is giving buyers plenty of choice and less urgency to purchase.”

New-to-the-market property investors will also be wary of the sector’s very modest rental yields, which reflect the nation’s elevated prices.

The uptick in rental growth — which coincided with peak immigration levels in recent years — is also starting to slow. Rental growth has recently been rising at less than half the pace property owners were achieving only two years ago.

National rents recorded their slowest growth in four years recently. Rents increased by 4.8 per cent over 2024, which was a significant drop from the 8.1 per cent surge of 2023.

Moreover, though rate cuts are now highly anticipated, the RBA is not due to meet for another “call” on the official rate until mid-May.

James Kirby hosts the twice-weekly Money Puzzle podcast