Red hot rental price growth set to cool as household budgets unable to bear more increases

The country’s red hot rental price growth is set to cool as stretched household budgets will be unable to bear more increases, according to forecaster Oxford Economics.

Oxford Economics says housing in Sydney has hit “peak unaffordability” and expects the resource-fuelled city of Perth to lead the charge on price growth to 2027. Picture: AAP Image/Mark Scott

The country’s red hot rental price growth is set to cool as stretched household budgets will be unable to bear more increases, according to forecaster Oxford Economics.

The group says housing in Sydney has hit “peak unaffordability” and expects the resource-fuelled city of Perth to lead the charge on price growth to 2027.

Oxford Economics said that despite higher interest rates eroding affordability, a fundamental under-supply of dwellings created upward price pressure that swept across markets and price brackets last year and rolled into 2024.

It warned that anticipated interest rate cuts from later this year, overlaid by a sustained housing shortage, meant that price growth is set to accelerate in 2025 and beyond.

But there is some relief for renters, with the economics group finding that growth in rents was expected to slow in the three years to 2027 because the capacity of stretched households to absorb further hikes was topping out.

The tough going for landlords will also ease, as lower interest rates over 2025 and 2026 will dial back leveraged investment property costs, softening the impulse from owners to push through large rent increases.

Oxford Economics senior economist Maree Kilroy said Perth was set to remain the star performer for house price growth. Sydney and Melbourne had steadied after showing signs of softening late last year, she said.

This was evident in an uplift in auction clearance rates – despite Sydney having arguably hit the peak of unaffordability. Ms Kilroy said that Adelaide and Brisbane had seen a continuation of late 2023 momentum, while Perth has sprinted ahead.

“While we expect national price momentum to slow in the second half of this year, it will accelerate again in 2025, with units set to outperform houses over the forecast period,” she said.

Oxford Economics senior economist Maree Kilroy. Picture: Oxford Economics

The big driver is surging demand, that has superseded the impact of interest rate increases, boosting home prices nationally.

“The Australian housing market was caught between two opposing forces in 2023 – higher interest rates and a fundamental under-supply of dwellings,” Ms Kilroy said. “The weight of demand eventually won out, creating upward price pressure that broadened across markets and price brackets throughout the year.”

The combined capital city dwelling median price bumped up to 1.5 per cent to $946,000 by the end of 2023. This gain was anchored by Perth, Adelaide, and Brisbane, masking the loss of momentum in Melbourne and Sydney. Houses ended the year up 7.6 per cent, while units gained 5.7 per cent, despite rising mortgage rates.

Oxford Economics said borrowers drew down on savings buffers built up during the pandemic and a large share of mortgages were being paid ahead.

“This has seen the rate of pressured or forced selling remain below the historical average, preventing it from becoming a systemic risk,” she said.

The group noted the impact of both high net overseas migration, which is driving the rental market and spilling over into housing, which is already been boosted by renters look to escape the cycle by buying homes.

Oxford Economics said the current overshoot in net overseas migration is adding heat to an already hot rental market, with the national vacancy rate holding at an extreme low of 1 per cent.

“From the current extreme low, we expect rental vacancy rates will lift slightly in 2024 but remain very tight by historical standards,” Ms Kilroy said. “Overseas migration looks to have peaked.”

Oxford Economics expects the median house price across capital cities to end 2024 up 4.7 per cent, with a stronger performance for units of 5.1 per cent.

Oxford Economics expects the median house price across capital cities to end 2024 up 4.7 per cent, with a stronger performance for units of 5.1 per cent. From then on, the housing shortage will help accelerate price growth in 2025.

After extended underperformance, units are positioned to outdo houses over the three years to financial year 2027, with 6.7 per cent average annual growth, against a projected lift of 6.2 per cent for houses. This is partly due to weak apartment completion volumes and intensifying competition, especially for inner-city units.

But Sydney will remain tough, as it has hit peak unaffordability.

“Housing affordability has been deteriorating since 2021,” Ms Kilroy said. “The recovery in prices, alongside further interest rate hikes in 2023 stretched affordability to its worst level in several decades.”

By the end of 2023, 46 per cent of the median gross household income was needed to service a typical 30-year mortgage nationally. Sydney was at peak unaffordability at a 56 per cent level but this is expected to drop to 40 per cent by mid-2027.