Will home prices drop in 2022

Property Market Forecast 2022

What's the outlook for the Australian property markets for 2023 and beyond?

This is a common question people are asking now that the housing markets have transitioned from the once-in-a-generation property boom experienced in 2020 -21 to the adjustment phase of the property cycle that could be best described as multi-speed.

While overall the Australian property market is in a downturn, not all of the nation’s property markets are being impacted equally.

Each State is at its own stage of the property cycle and within each capital city there are multiple markets with property values falling in some locations, and stagnant in others and there are even a few locations where housing values are still rising.

Source: Corelogic 1st December 2022

After recording significantly stronger appreciation through the upswing, the fall in regional dwelling values is catching up with the capital cities.

We've moved into this next stage of the property cycle faster than some expected, pulled forward by an earlier and more aggressive interest rate tightening cycle due to the RBA's response to a surprisingly strong surge in inflation.

While much of this is due to offshore factors that can be expected to ease over time, the high starting point for inflation and tight labour market domestically means the RBA is moving aggressively on interest rates – taking them from COVID 'emergency' lows to more 'normal' levels.

And this has caused many commentators to warn that we are going to have a housing market crash

I don’t think so! And I'll explain why in a moment, but first, let's look at what's really going on in our property market...

What's currently happening to property values in Australia

The following table shows what happened to dwelling prices around Australia since the pandemic.

As you can see while values in our capital cities grew considerably, the regional property market performed even better during the last property boom.

But now we're in the adjustment phase of the property cycle and overall property values are  6% lower than their peak.

That's not a property market crash-is it?

It's an orderly correction that had to occur after house prices all around Australia got ahead of themselves.

Let's look at this graphically....

Source: NAB December 1st 2022

At the same time we're experiencing a rental crisis with historically low vacancy rate and rising rents.

Sure interest rates are rising, but they're only one of the many factors that affect home prices.

For a property market to "crash" there must be a large number of forced sellers and nobody on the other side of the transaction to purchase their properties meaning they have to give away their properties at very significant discounts.

Remember home sellers are also homebuyers – they have to live somewhere and the only reason they would be forced to sell and give up their home would be if they were not able to keep up their mortgage payments.

This happens when:

1. Unemployed levels are high - today anybody who wants a job can get a job.
2. Mortgage costs (interest rates) zoom up - despite rising interest rates, they are only like you to get to where they were before the pandemic a couple of years ago and borrowers could cope then.

Sure, what happens next to our property market will be partly shaped by the speed and extent of further interest rate tightenings, but as you will read below there are still many positive factors underpinning our housing markets which means that the property crash which the Property Pessimists are predicting is unlikely to occur.

And we know from recent history that neither the banks, our governments or the RBA want to see a housing market crash and they'd rather support mortgage holders than take over their homes.

Source: CoreLogic, December 1st 2022

The total value of Australia’s residential property market is now worth $9.7 trillion after growing at the fastest annual pace on record in 2021.

Residential property prices rose 23.7% through 2021, meaning that the collective value of the wealth of property owners increased by $2 trillion in just one year alone!

And even though many homeowners and property investors took on more debt, the total of all the loans outstanding against all the residential real estate in Australia is $2.1 trillion - in other the "overall" Australian housing market has a very low (23%) Loan to Value ratio.

Australian housing market predictions

Now I know some potential buyers are asking:

Well, now that the boom is over will the property market crash in 2023?

They have obviously been listening to those perma-bears who keep telling anyone who's prepared to listen that the property markets are going to crash, but they've made the same predictions year after year and have been wrong in the past and will be wrong again this time.

You've probably also read those forecasts - you know...that property values will fall 10 to 15%.

In fact... Property Prices Will Fall 30% was a recent headline in the Australian Financial Review by a respected columnist, and here he was not talking about a specific segment of the market, but about "the Australian property market”.

Fact is.... a fall of this magnitude has never happened before.

Not during the recession of the 1990s, not during the global financial crisis and not during the period of a credit squeeze in 2017-18.

The worst slump in the overall Australian property market was after the credit squeeze on 2016-17 and when there were concerns around proposed changes to negative gearing before the 2019 election.

And at that time the peak to trough drop between December 2017 and June 2019 was 9.9%.

And considering the current state of the economy, our financial health and property markets there's no credible reason to suggest a fall of this magnitude should happen now.

Sure we're experiencing a housing market correction - it started at the beginning of the year in Sydney and Melbourne - and is now working it's way across the nation, but there will be no property market crash.

But as you can see, from the following chart, over the years, a property booms have been large in the following downturns have been small, in proportion to the previous rise in prices.

Source: Domain

RBA economic forecasts

In its November Statement of Monetary policy the RBA has revised up its forecasts for inflation and unemployment, and revised lower its forecasts for Australia’s economic growth.

The RBA sees inflation peaking at 8.0% in the fourth quarter of 2022 (up from its previous forecast of 7.8%) before slowing to 4.7% over 2023 and 3.2% over 2024.

The RBA doesn't seem to my mind that it will take inflation sometime to fall to within its desired range of 2 to 3%, suggesting that it is not going to aggressively raise interest rates like some overseas central banks are.

The RBA has left its options open, saying that:

"The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market."

Just how high the cash rate will go remains a contentious issue.

The Reserve Bank of Australia (RBA) started hiking the official interest rate in May and has delivered consecutive double-whammy hikes since June, however the last 2 interest rate rises have been 0.25%.

However, interest rates will likely continue to rise one or two more times to subdue inflation, with the core measure the RBA watches most closely expected to peak at 6.5% by December.

Reflecting its slower economic growth forecast, the RBA has upgraded its unemployment forecast, now expecting unemployment to creep up to 4.5%.

Note: RBA boss tips 10% house price falls!

Speaking in front of a parliamentary committee in Canberra Reserve Bank governor Philip Lowe says he wouldn’t be surprised if house prices came down by 10 per cent as higher interest rates bite.

Now that's nowhere near as dire a prediction as made by those perpetual property pessimists and much more realistic in my opinion.

In fact we're probably halfway there.

Dr Lowe says the RBA does not explicitly forecast house prices, and he noted that home values went up 25 per cent over the past two years: which he said was “A very, very big increase”.

“It would not surprise me – and this is not a forecast – but it would not surprise me if prices came down by a cumulative 10 per cent.

And even if they did that, they're still up 15 per cent over three years.

We don't want to forecast housing prices because it's very, very difficult to do, but as interest rates rise further, and they will rise further, I'd expect more heat to come out of the housing market and prices to come down further."

“The fact that Australians have to pay high prices for housing isn’t about (interest rates) over a long period of time.

It's the choices we’ve made as a society that have given us high housing prices,” Dr Lowe says.

“And the high housing prices come not from the high cost of construction, they come from the high cost of land embedded in each of our dwellings,” he says.

“And why do we have a high cost of land? Because of the choices we have made about taxation, the choices we’ve made about zoning and urban design.

“The fact that most of us have chosen to live in fantastic cities on the coast.

And that we want a block of land.

We don’t want to live in high density, and we’ve chosen as a society to underinvest in transport.

“So all of those things have either reduced the supply of well located land, and so we have high land prices embedded which gives us high housing prices. Interest rates have influenced the cycle, but not structurally.”

So how much further will interest rates rise?

Economists at Australia's big 4 banks are mixed in their outlook following the RBA's most recent interest rate rise:

• CBA predicts a peak cash rate of 3.1%
• NAB believes rates will rise to 3.6%
• Both Westpac and ANZ believe rates will peak at 3.85%

What about mortgage stress?

Recent RBA modelling shows that overall the majority of variable rate mortgage households are likely to be well placed to manage higher minimum loan repayments should the RBA cash rate rise by another 1% to 3.60%.

The analysis suggests households should be able to weather an RBA cash rate of 3.6% without raising any financial stability concerns.

Whether the cash rate needs to get to that level will of course depend on the outlook for inflation and how households respond to higher rates – to what degree do they draw down on accumulated savings buffers and/or reduce real consumption.

• Households will meet higher minimum mortgage repayments by drawing down on savings buffers, or paring back on real non-essential consumption.
• 95% of owner-occupier variable rate borrowers will still face a reduction in free cash flow, with such reductions being large for around 50% of borrowers.
• On the upside it is clear that around half of variable rate owner-occupier households have large buffers - 55% would not exhaust buffers for at least two years even with higher minimum repayments if they chose to maintain non-essential spending.
• On the downside, 30% would exhaust buffers with higher minimum repayments within six months if they maintained non-essential spending at current levels.

I know the media is full of stories about mortgage stress leading the regular band of ‘negative nellies’ to say this will lead to forced sales and drive down our property market.

However, I believe this is unlikely for a number of reasons:

• Interest rates will only end up a little higher than they were prior to the pandemic and we weren't troubled by mortgage stress then.
• The banks have been conservative and anyone who borrowed in the last few years had the serviceability checked based on the presumption that it would rise at least 2.5% if not 3%.
• Aussies have built up a significant war chest of savings in their offset accounts and more than half of mortgage holders have paid their mortgage many months in advance.
• Half of the Australian homeowners have no debt at all, while most people who bought a property in the last couple of years already have significant equity, investors are getting higher rent while homeowners are getting higher wages.
• Our economy is growing strongly and anyone who wants a job can get a job – inflation and high-interest rates are a concern when unemployment creeps up and people can't pay their mortgages, but that's not the case at present.
• The Australian residential real estate market is too big to fail - neither the banks want property values to drop – it's not really in their interest.
• I've already explained the RBA's modelling in October 2022 which showed that most Aussie households should be able to weather an RBA cash rate of 3.6% without raising any financial stability concerns.

Dr Andrew Wilson's property market forecasts

Dr Andrew Wilson reported that all capitals, with the exception of Sydney, reported marginally higher asking prices for established houses listed for sale over November compared to the previous month.

Other findings include:

• Perth was the top monthly performer with house prices higher by 0.6%, followed by Brisbane up 0.4%, and Adelaide and Melbourne each up by 0.1%.

• Sydney house prices however were lower, falling by 0.8% over the month.

• Adelaide and Brisbane house prices remain significantly higher than recorded over November 2021 – up by 20.7% and 18.6% respectively.

• Perth's annual house prices have increased by 8.9% with Melbourne up by just 1.2%.

• Sydney house prices however are now lower by 0.8% compared to November 2021

On the other hand, asking prices for established units listed for sale produced mainly positive results over November.

Adelaide was again the top performer with median house prices increasing by 4.2% over the month followed by Sydney up 2.4% and Melbourne up 0.4%.

Prices however were lower in Brisbane and Perth, down by 1.6% and 0.2% respectively.

Another indication that market sentiment is changing is rising auction clearance rates which are a good in time indicator of buyers and seller sentiment.

Negative influences on our property markets

Sure our housing markets are facing some headwinds, including:

• Consumer confidence has taken a significant hit and that's affecting our housing markets with buyers being more cautious and many taking a wait-and-see approach, while sellers’ confidence is more fragile.
• Fear of rising inflation and cost of living pressures is sidelining many buyers
• Rising interest rates are reducing borrowing capacity
• Uncertainty about our economic future with all the talk of a recession overseas, ongoing geopolitical problems, the share market falling is dampening buyer and seller confidence
• Affordability issues will constrain many buyers: The impetus of low-interest rates allowing borrowers to pay more has worked its way through the system.
  Now, with property values being 20- 30% higher than at the beginning of this cycle - and at a time when wages growth has been moderate at best and minimal in real terms for most Australians - this means that the average home buyer won’t have more money in their pocket to pay more for their home.
• The pent-up demand is waning: While many buyers delayed their home-buying plans over the last few years because of Covid, a significant volume already made their move. There are only so many buyers and sellers out there, so we can expect there will be fewer looking to buy in 2022.
• FOMO (Fear of Missing Out) has disappeared: Buyers are being more cautious and taking their time to make decisions. This is in stark contrast to last year when many took shortcuts to enter the market.

On the other hand there are still...

Strong fundamentals underpinning our housing markets

These include:

• There is a shortage of good properties for sale and virtually no properties to rent
• International immigration is picking up and this will increase the demand for housing.
• There is little new construction in the pipeline – we’re just not building enough dwellings and increasing construction costs at a time of a shortage of labour means the end value of new projects will need to be up to 20% higher to make projects financially viable for developers.
• Our economy is still growing  and Unemployment is at historically low levels meaning anyone who wants a job can get a job (so they'll be able to pay the mortgage repayments.)
• Wages are starting to grow
• Household balance sheets are strong - we have a ‘natural buffer’ with $250- $260 billion in aggregate savings nationally, much of it in offset accounts.
• Many borrowers are ahead in their mortgage payments - Matt Comyn, chief executive of Commonwealth Bank recently said that three-quarters of their loans are approximately two years ahead on repayments.
• We have a strong banking system that has been strict in its lending criteria, meaning there are very few non-performing loans.
• There are still Government incentives to encourage first-home buyers into the market.

The last few years have shown us how hard it is to forecast property trends… but here goes - I'm going to share a number of property predictions for the balance of 2022 and beyond.

1. Further property price falls

We’re seeing property prices fall in both capital cities and regional Australia, but the pace of these falls are starting to slow down.

And our housing markets are fragmented -  there is not one Sydney property market or one Melbourne property market.

There are markets within markets – there are houses, apartments, townhouses and villa units located in the outer suburbs, middle ring suburbs, inner suburbs and the CBD.

And they're all behaving differently.

But overall our markets are suffering, in part due to falling consumer confidence (the RBA wants to slow down our enthusiasm in order to dampen inflation) and in a large part due to affordability issues.

In short, buyers need more money to buy a property…. but they aren’t able to borrow as much as they could when interest rates were lower.

And the rising inflation and cost of living mean a deposit is harder to save.

So it’s easy to see why we’re entering a downturn, isn’t it?

But wait, there's more.

A fall in new listings - new properties coming onto the market for sale have taken some pressure out of the market, while there has been a shift and rotation in spending from goods back to services on top of a decline in consumer and home buyer confidence thanks to concern about rising rates, inflation and the future of property values.

2. There are still lots of people interested in buying property

While many factors affect property values, the main drivers of property price growth are consumer confidence, availability of credit, low-interest rates, economic growth and a favourable supply and demand ratio.

The following chart shows that home buyers and investors are still obtaining finance approvals and this means they intend to buy property.

As you can see the latest figures show over $28 billion of finance was approved last month meaning their new buyers in the market with a budget of over $30 billion.

There are still some strong patches in our property markets where A-grade homes and investment-grade properties are still selling well.

It’s a bit like having one hand in a bucket of hot water and another hand in a bucket of cold water and saying “on average I feel comfortable”.

However strategic investors are not phased by this stage of the cycle, they understand real estate is a long-term game and they’re more focussed on the long-term rise in values rather than short-term slumps.

It's likely prices will keep falling a little as the RBA continues its rapid tightening cycle in order to quell the rise in inflation.

While fixed rates have already risen sharply, the steep increases in the cash rate is now flowing through to variable mortgage rates, lifting minimum repayments significantly and reducing borrowing power. 

On the other hand, the return of immigration, falling unemployment and rising wages as well as rising exports and a strong economy will be supportive factors.

3. Our property markets will be fragmented

The recent property boom was very unusual.

All types of properties in almost any location around the country increased in value substantially.

Moving forward our property market will be much more fragmented.

If you think about it, certain demographic segments will find the rising cost of living due to inflation and higher rents or higher mortgage costs at a time when wages are not keeping up with inflation will either stop them getting into the property markets or severely restrict their borrowing capacity.

This will impact negatively on the lower end of the property markets which will also be affected by the fact that many first home buyers borrowed to their full capacity and will have difficulty keeping up their mortgage payments up at the time of rising interest rates or when their fixed rate loans convert to variable rates.

In other words, there will be little impetus for capital growth at the lower end of the property market

That's why I would only invest in areas where the locals’ income is growing faster than the national average.

These tend to be the "established money" areas or gentrifying suburbs.

Think about it… in these locations, locals will have higher disposable incomes and be able to and are likely to be prepared to pay a premium to live in these locations.

Many of these locations are the inner and middle-ring suburbs of our capital cities which are gentrifying as these wealthier cohorts move in.

There are great investment opportunities in these suburbs in houses and townhouses

4. Property demand from home buyers will continue

Last year when home prices surged around Australia the media kept reminding us we were in a property boom.

The result was that emotions ran high and FOMO was a common theme around Australia’s property markets.

Now that overall growth in our property markets has slowed as we discussed above buyers are becoming more selective.

Yet there are still more buyers in the market for A-grade homes and investment-grade properties than there are properties for sale and this will underpin the values of this type of property moving forward.

Sure some of the discretionary buyers are now out of the market, but people are still getting married, others are getting divorced and some are having babies and they usually require new homes, so our property markets are going to keep on keeping on.

5. Investors will keep entering the property market

And they’ll squeeze out first-home buyers.

As rents rise and the share of first-home buyers drops, strategic investors with a realistic long-term focus will return to the market.

While there were many first-time buyers (FHBs) in the market in 2021, buoyed by the many incentives being offered to them, now demand from FHBs is fading as property investors re-enter the market.

Of course over the last few years, investor lending has been low, but with historically low-interest rates and easing lending restrictions, investors are back with a vengeance.

In the last month investor loan approvals fell a little, but a total of $9.3 billion of new loans were approved to investors last month.

6. Neighbourhoods will become more important and people will pay a premium to be in the right neighbourhood

If Coronavirus taught us anything, it was the importance of living in the right type of property in the right neighbourhood.

Now that we have emerged from our Covid cocoons there is a flight to quality properties and an increased emphasis on liveability.

As their priorities change, some buyers will be willing to pay a little more for properties with “pandemic appeal” and a little more space and security, but it won’t be just the property itself that will need to meet these newly evolved needs – a “liveable” location will play a big part too.

In our new “Covid Normal” world, people will pay a premium for the ability to work, live and play within a 20-minute drive, bike ride or walk from home.

They will look for things such as shopping, business services, education, community facilities, recreational and sporting resources, and some jobs all within 20-minutes' reach.

Residents of these neighbourhoods have now come to appreciate the ability to be out and about on the street socialising, supporting local businesses, being involved with local schools, and enjoying local parks.

Many inner suburbs of Australia’s capital cities and parts of their middle suburbs already meet the 20-minute neighbourhood tests, but very few outer suburbs do because there is a lower developmental density, less diversity in its community, and less access to public transport.

And ‘neighbourhood’ is important for property investors too, and here’s why.

In short, it’s all to do with capital growth, and we all know capital growth is critical for investment success, or just to create more stored wealth in the value of your home.

Sure there is always the opportunity to add value through renovating your property or making a quick buck when buying well.

But these are one-offs and won’t make a long-term difference if your property is not in the right location, because you can’t change or upgrade the location.

This is key because we know that 80% of a property’s performance is dependent on the location and its neighbourhood.

In fact, some locations have even outperformed others by 50-100% over the past decade.

And it’s likely that moving forward, thanks to the current environment, people will place a greater emphasis on neighbourhood and inner and middle-ring suburbs where more affluent occupants and tenants will be living.

These ‘liveable’ neighbourhoods with close amenities are where capital growth will outperform.

How do we identify these locations?

What makes some locations more desirable than others?

A lot has to do with the demographics – locations that are gentrifying and also locations that are lifestyle locations and destination locations that aspirational and affluent people want to live in will outperform.

It's well known that the rich do not like to travel and they are prepared to and can afford to pay for the privilege of living in lifestyle suburbs and locations with a high walk score – meaning they have easy access to everything they need.

So lifestyle and destination suburbs where there is a wide range of amenities within a 20-minute walk or drive are likely to outperform in the future.

Hence why, as discussed above, these areas will fetch a premium.

At the same time, many of these suburbs will be undergoing gentrification - these will be suburbs where incomes are growing, which therefore increases people’s ability to afford, and pay higher prices, for the property.

7. Rent prices will increase strongly

Australia is experiencing a rental crisis.

Increased rental demand at a time of very low vacancy rates will see rentals continue to rise throughout the next few years.

Then as our international borders open further this will further increase the demand for rental housing.

If you think about it...when people initially move to a country or region, most rent first.

In addition, when foreign students return we'll see increased pressure on apartment rents close to education facilities and in our CBDs.

The table above from SQM Research shows that they're only around 33,000 vacant properties in Australia – we are the 200,000 new immigrants going to live?

And as rising house rentals will create affordability issues for many tenants, apartment rentals will also increase in 2022.

8. Migration will resume

Freed from the constraints of needing to travel to a CBD office each day, and sick and tired of being locked down in our southern states, many Aussies migrated northwards to south-east Queensland last year.

And now that Australia’s internal borders have opened up it's likely that the northern migration will continue into 2022 driven by Queensland’s more affordable housing and perceived lifestyle benefits.

This, in addition to employment growth, long-term benefits of hosting the Olympics and the extra infrastructure building, means this part of Australia is looking particularly positive.

Not only this but overseas migration has also resumed, putting extra pressure on our housing markets, particularly in inner-city areas and near student campuses.

And recently Prime Minister Anthony Albanese has increased the quota for new skilled migrants to Australia.

9. The property cycle will be dominated by upgraders

The current property and economic environment, plus the scars left on many of us after a year or two of Covid-related lockdowns, have meant that Aussies are looking to upgrade their lifestyle, and this is something we’re going to see even more of in the coming years.

In fact, there are four key types of ‘upgraders’ we’re likely to see more from during this property cycle.

1. Tenants upgrading to better rentals - Many tenants are no longer happy to live in small dingy apartments and with an oversupply of rental units available in many areas, they are taking the opportunity to upgrade their accommodation. Other tenants who have managed to save a deposit are taking advantage of many of the many incentives available and are becoming first home buyers.
2. Homeowners upgrading to larger, better, homes - With interest rates still relatively low many existing homeowners are upgrading their accommodation to larger homes in better neighbourhoods. In fact, a recent survey suggested that one in three homeowners are looking to sell their homes in the next 5 years.
3. Homeowners looking for a sea- or tree-change - While small group homeowners are upgrading their lifestyle and moving out of the big smoke to regional Australia, more Aussies are looking to upgrade their lifestyle by moving to a better neighbourhood.As mentioned above, they love the thought that most of the things needed for a good life are just around the corner.
4. Baby boomers downgrading - Many Baby Boomers are looking to upgrade their accommodation by moving out of their old, tired family homes into large family-friendly apartments or townhouses. But they’re not looking for a sea change or tree change, they’re keen to live in “20-minute” neighbourhoods close to their family and friends.

10. Our economy and employment will remain robust

Sure the RBA wants to slow down our spending a little to bring down inflation, but despite this our economy will keep growing (albeit a little slower) and the unemployment rate will remain low as many new jobs will be created as our economy grows.

So how long will this downturn cycle continue?

Currently I see a window of opportunity for property investors with a long-term focus.

This window of opportunity is not because properties are cheap, however, when you look back into three years' time the price you would pay for the property today will definitely look cheap.

The opportunity arises because consumer confidence is low and many prospective homebuyers and investors are sitting on the sidelines.

However, I believe later this year or early next year as many prospective buyers will realise that interest rates are near their peak, inflation will have peaked and the RBA's efforts will bring it under control.

And at that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.

We saw an opportunity like this in late 2018 - early 2019 when fear of the upcoming Federal election stopped buyers from entering the market. And look what's happened to property prices since then.

I saw similar opportunities at the end of the Global Financial Crisis and in 2002 after the tech wreck. History has a way of repeating itself.

You see...consumer sentiment shifts play a big role in the world of property.

When consumer sentiment is low as it currently is, this shows up in various metrics including:

• Rising days on market (how long it takes to sell a property.
• Property sales volumes reducing
• Vendor discounting increasing to meet the market
• Auction clearance rates falling
• Prices at the premium end of the property market fall first.

But as consumer sentiment picks up, and it will once people realise inflation has peaked and the RBA doesn't need to increase interest rates further, and that's likely to be in the first or second quarter of 2023, we'll see a shift in the metrics

• Buyers will feel more confident and re-enter the market.
• Property prices will stop falling
• More vendors will feel comfortable putting their properties up for sale.
• Prices will stabilise for a while and then slowly pick up
• The media will start telling good news stories, rather than trying to scare us about real estate Armageddon

Poor consumer sentiment when most other economic fundamentals are strong simply means it's a cloud covering the sun.

Spring will follow Winter, and Summer will follow Spring - this too shall pass by and the long-term upward trend of the value of well-located properties will continue.

So my recommendation is that if you're in a financially sound position, to buying while others are sitting on the sidelines

While it may feel strange and counterintuitive to buy in a correcting market, there are many valid reasons why this is the best time to buy….and history has shown this to be correct over and over again.

• There is less competition at present.
• You have more time to conduct your due diligence and research.
• It's a buyer's market that gives you the upper hand in negotiations.

But don't try and time the market - this is just too difficult.

And don't look for a bargain - A-grade homes and investment-grade properties are in short supply and still selling for reasonably good prices.

These high-quality properties will tend to hold their value far better than B and C-grade properties located in inferior positions and inferior suburbs.

And don't worry too much...

While a lot has been said about the +20% increase in property values many locations have enjoyed prior to this downturn, it must be remembered that the last peak for our property markets was in 2017 and in many locations housing prices remain stagnant over a subsequent couple of years which means that average price growth was unexceptional over the long term, averaging out at around 5 per cent per annum over the last 5 years.

Now I know some people are worried and wondering: "Are the Australian property markets going to crash in 2022 0r 2023?"

They hear the perpetual property pessimists who've been chasing headlines and telling everyone who's prepared to listen that the Australian property markets are going to crash and housing values could drop up to 20% - but just look at the terrible track records - they've been predicting this every year for the last decade and they've been wrong.

I've recently written a detailed article outlining 10 Reasons Why Our Property Markets Won't Crash - you can read it here.

What is really affecting the market currently is poor consumer confidence.

What drives Australian property prices?

As we discussed earlier, there isn’t ‘one’ Australian property market.

In fact, there isn’t even just one Melbourne, Sydney, Brisbane etc. property market either.

Every market in every area is segmented, and prices in some of these segments will outperform going forwards, while others will not.

But forecasting Australian house prices isn’t as simple as it might seem.

In the medium term, property values will be linked to the extent that our economic recovery affects income, employment, borrowing capacity, and credit availability.

Generally, this boils down to two basic economic concepts: Supply and demand, and inflation.

However, there is a sub-component of demand, called “capacity-to-pay”, which is often overlooked.

Understanding how these concepts work together to affect real estate is crucial to one’s belief or doubt about whether real estate values will rise.

In a free-market economy, prices of any commodity will tend to drop when supply is high and demand is low.

In other words, when there is more than enough of something, it is said to be a “buyer’s market” because sellers must compete, typically by lowering the price, to attract a buyer.

Conversely, when supply is low and demand is high, prices will tend to rise as buyers bid up pricing to compete for the limited supply.  This is called a “seller’s market”.

Let’s look at it this way….

• With regard to supply…. they aren’t making any more real estate in the most desirable areas and by this, I’m talking about the dirt, not the buildings.
• With regard to demand, Australia has a business plan to increase the population to 40,000,000 people in the next 30 years. 

Now we’ve covered the two basic economic concepts, let's take a look at the 8 key underlying fundamentals supporting our property markets in the medium-long term.

1. Population growth

For the last few decades, continued strong population growth has been a key driver supporting our property markets.

Australia’s population was growing by around 360,000 people per annum, meaning we needed to build around 170,000-180,000 new dwellings each year to accommodate all the new households.

Over the last two years, population growth stagnated, but this should increase again now that the gates have been opened and over 200,000 overseas immigrants will be allowed to come to our shores.

Of course, Australia is likely to be seen as one of the safe havens in the world moving forward.

At the same time, the number of new properties listed for sale in our capital cities is falling creating an imbalance of supply and demand.

2. Housing supply

Housing supply clearly has a significant influence over house prices: an undersupply puts pressure on prices to rise while an oversupply would do the opposite.

The oversupply of dwellings previously experienced in many Australian locations has now disappeared and there are very few new large development projects on the drawing board.

We’re experiencing a severe undersupply of well-located properties in our capital cities and considering how long it takes to build new estates or large apartment complexes, and because of increased construction costs, most developments on the drawing board are not financially viable at present, meaning there is no suggesting we'll have an oversupply of properties for some time. 

3. House size trends have changed

Also on the topic of supply, Australian households have aged and pretty soon millennials will make up one-third of the property market and their household trend, in general, is for smaller-sized properties.

More one and two-person households mean that moving forward, we will need more dwellings for the same number of people.

4. Interest rates

A low-interest-rate environment makes it possible for buyers to borrow more money, and more cheaply.

This in turn, as we saw over the past couple of years, creates a headwind for buyers.

More buyers mean supply struggles to catch up, and an imbalance occurs.

In the current market, interest rates are rising quickly, and are expected to hike further throughout the remainder of the year, but the peak of interest rates is in sight with the RBA now slowing the level of its interest rate hikes.

5. Renters

Increased rental demand at a time of very low vacancy rates will see rentals continue to rise for the next few years. 

And this will put pressure on the housing supply.

Soon 40% of our population will be renters, partly because of affordability issues but also because of lifestyle choices.

The government isn’t providing accommodation for these people. That’s up to you and me as property investors.

On the other hand, the pressurised rental market will force some would-be buyers to get into the property market sooner than planned.

6. Investors

Investors help drive market sentiment and trends, which has a knock-on effect on property prices.

Despite the recent rise in interest rates, investors are back with a vengeance. 

Some are attracted by the rising rents and higher yields, while others are taking advantage of the window of opportunity the current buyer's market is offering.

More investors mean more buyers, which means more demand versus the supply of properties available.

7. The economy

Another key factor that affects the value of the property market is the overall health of the economy. 

This is generally measured by economic indicators such as the gross domestic product (GDP), employment data, manufacturing activity, the prices of goods, etc. 

Broadly speaking, the economy is strong and the RBA is trying to slow it down to bring inflation under control, but currently, everybody who wants a job can get a job and this will underpin our housing markets even if the economy falters a little moving forward.

8. Availability of debt

It goes without saying that the availability of debt directly affects the trajectory of property prices.

At the moment, Australia’s banking system is strong, stable, and sound.

And the banks are trying to attract new customers with honeymoon interest rate deals.

Even though a few home buyers have overcommitted themselves financially, there should be no real concern about household debt because, in general, it is in the hands of those who can afford it.

Sydney House Price Forecast

Australia’s house prices reached record highs during the peak of the Covid-19, with our most expensive city – Sydney – leading the pack.

And while prices have since cooled from their peak across the city, Sydney’s property market continues to fetch impressive prices, particularly in some of the most sought-after areas.

After all, some of the city’s suburbs are so tightly held that an available property for sale comes around once in a blue moon with homeowners holding onto their houses for as long as 20 years.

And areas in lifestyle or coastal suburbs are still in particularly strong demand as homebuyers wait to secure their dream property.

The city’s median price for houses now stands at $1.257 million, down 6.1% since the last quarter and down 9.3% over the year.

It’s a similar story for units which have fallen 3.3% over the quarter and 6.8% over the year to a new $783,406 median.

As the market cools, the number of home sales has fallen and over the last few months Sydney auction clearance rates have been rising, indicating more buyers and sellers are reaching an agreement on price.

At Metropole Sydney we’re finding that strategic investors are looking to take advantage of the window of opportunity currently available to them, while homebuyers are still actively looking to upgrade, picking the eyes out of the market.

While overall Sydney property values are likely to fall a little further, like all our capital cities there is not one Sydney property market, and A-grade homes and investment-grade properties remain in strong demand are likely to outperform, many holding their values well.

In other words, the various sectors of the Sydney property markets will be fragmented, which is a more “normal” property market.

Even though median house prices in Sydney are still falling, the rate of decline is decreasing, and Dr Andrew Wilson reported that "asking prices" for established houses listed for sale in Sydney were steady over October and fell 0.8% over November.

At the same time auction clearance rates are rising with preliminary auction clearance rates continuously reporting in the high 60% mark, again, showing increasing strength in the Sydney housing market.

Melbourne House Price Forecast

Housing values across Melbourne increased by 17% through the growth phase, with house values up 21% and unit values rising 11%.

Since peaking in February, house values are down -3% and unit values have reduced by -1%.

Taking the recent decline into consideration, Melbourne housing values are up by 8.6% or roughly $24,200 since the onset of Covid back in March 2020.

As conditions cool, the number of home sales is also trending lower, down by an estimated -18% in the June quarter compared with the same period last year.

As buyer demand wanes, advertised supply levels have risen to be 3% higher than a year ago and 9% above the five-year average for this time of the year.

With more stock, market conditions are now favouring buyers over sellers with clearance rates holding below 60%, while days on market and vendor discounting rates trended higher for private treaty sales.

With higher inventory levels and less competition, buyers are gradually getting some leverage back.

At Metropole Melbourne we’re finding that strategic investors and homebuyers are still actively looking to upgrade, picking the eyes out of the market.

While overall Melbourne property values are likely to fall further over the rest of the year, like all our capital cities there is not one Melbourne property market, and A-grade homes and investment-grade properties remain in strong demand and are likely to outperform, many holding their values well.

And the rate of decline is decreasing with Dr. Andrew Wilson reported that "asking prices" for established houses listed for sale in Melbourne were steady over October and rose 0.1% over November.

While Melbourne’s preliminary auction clearance rates this time last year were around 80%, they slumped earlier this year, but are on the rise again with buyers back in the market and clearance rates are currently holding around the mid 60%s, which means 6 out of 10 buyers and sellers are agreeing on a price.

Median property prices for Melbourne

READ MORE: Melbourne property market forecast

Brisbane House Price Forecast

Brisbane’s house prices saw the steepest annual climb in 13 years in 2021, as the city’s property market came to grips with relentless Covid-19-induced demand for property.

This once-in-a-generation property boom resulted in almost 400 suburbs joining the million-dollar club.

And even as growth slowed in other parts of Australia, Brisbane’s housing market continued to perform strongly in the first half of 2022.

Even though prices have now begun to fall from their peak, the market has done so with a significant lag from the price drops across the rest of Australia.

And unlike in Sydney and Melbourne, prices are still far higher across the city than just 12 months ago.

As of November, the median price for houses in Brisbane stood at $817,684, which is a 2.2% decline month-on-month and a 6.2% decline quarter-on-quarter.

But year-on-year, Brisbane’s house prices are 8% higher today.

It’s the same story for units too.

Brisbane’s $494,785 median unit price is 0.9% lower than last month, 1.2% lower quarter-on-quarter but still a 10.7% improvement on prices recorded at the same time last year.

Why is the market so robust, you might ask?

Well, there has been significant internal migration (particularly northwards from Victoria and NSW) into Queensland with Australians looking for more affordable property in lifestyle suburbs.

And the property market is prosperous as a result.

But even though the north-eastern state remains one of the country’s most robust, if you’re looking to buy, you’ll be pleased to hear that you can get more bang for your buck in Brisbane compared to Sydney and Melbourne.

Currently the team at Metropole's Brisbane office are finding property investor activity to be strong, particularly for houses, and not only coming from locals but from interstate investors who see strong upside in Brisbane property prices as well as favourable rental returns.

However, there is not one Queensland property market, nor one southeast Queensland property market, and different locations are performing differently and are likely to continue to do so.

Houses remain a firm favourite of prospective home hunters, with demand rising post-lockdown and it remains significantly elevated compared to last year.

However, apartment demand has been sliding and, in general, apartments in Queensland are a higher risk investment than houses, particularly due to a high supply of apartments that are unsuitable for families or owner-occupiers.

Brisbane is likely to be one of the best performing property markets over the next few years, but while some locations in Brisbane have strong growth potential, the right properties in these locations will make great long-term investments, and certain submarkets should be avoided like the plague.

Our Metropole Brisbane team has noticed a significant increase in local consumer confidence with many more homebuyers and investors showing interest in a property.

At the same time we are getting more enquiries from interstate investors there we have for many, many years.

READ MORE: Brisbane’s property market forecast for the year ahead

Canberra House Price Forecasts

Canberra’s property market has been a “quiet achiever” with median house prices recording the biggest jump in prices across all of Australia’s capital cities, at a huge 25.5% in just one year or 3.7% over the quarter, to a new median of $1.015 million according to Domain's House Price Report.

That means that prices soared by almost $1,054 a day over the June quarter to give a total rise of $96,000.

This is the steepest price acceleration in almost three decades, the Domain report explained.

Median house prices in the inner north, inner south, and Woden Valley are now all above seven digits.

But unit price growth has been more restrained as the development boom of recent years contains prices, although they are edging closer to a record high, up a more modest $18,000 (or 3.6%) over the June quarter to $504,217.

Interestingly, since the pandemic, Canberra house prices have risen a huge 30.9% and unit prices 9.4%, which is the highest rate of growth across all of Australia’s cities.

The strong auction clearance rates throughout the year have been another sign of the strength of the Canberra property market.

Perth House Price Forecast

Perth housing values were up 0.4% in June, marketing the second month in a row where the rate of capital gain has reduced.

The slowdown follows a temporary rebound in Perth's rate of growth that coincided with reopened state borders, however, it is looking like the Perth market is once again losing some steam alongside the national trend.

Advertised housing stock remains extremely low and is trending lower as buying activity remains elevated, implying selling conditions remain strong across the Perth market.

This is backed up by rapid selling times as homes average just 18 days to sell, although such rapid selling time has occurred as discounting rates have edged higher.

With the median dwelling value of $558,600 remaining the lowest across the capital cities, housing affordability is less challenging than in other capitals, which could help to insulate the Perth housing market from a larger downturn.

Perth’s isolation and economic over-reliance on the mining industry mean many potential home buyers would look at moving away to further their careers.

But the attractive property prices in Western Australia do not mean that investors should jump into the Perth property market – there are better opportunities in other parts of Australia.

The problem is the Western Australian economy is too dependent on one industry – the mining industry and much of this is dependent on China, and this has a direct knock-on effect on Western Australian house prices.

Without structural changes to the WA economy, it is unlikely to be able to deliver the significant number of higher-paying jobs and the substantial increase in population growth required to keep driving strong housing price growth in the medium to long term.

Hobart House Price Forecast

Hobart was the darling of speculative property investors and the best-performing property market in 2017-8, but since then Hobart property growth has slowed.

Hobart property prices have been supported by strong demand and weak market supply.

Here we have pulled together the latest data on Tasmania’s property prices.

MEDIAN PROPERTY PRICES FOR HOBART

Source: Corelogic, 1st December 2022

Adelaide House Price Forecast

Adelaide has continued to stand out as the nation's strongest capital city housing market.

Through the growth cycle, Adelaide housing values have increased by 44% adding roughly $197,000 to the median dwelling value.

Most of this growth has been centred in the housing market rather than units, with values up 48% through the cycle to date, while unit values are up a smaller 23%.

One of the key factors pushing up prices is the ongoing shortage of advertised supply.

However the Adelaide property market has now joined the rest of Australia in its housing slowdown falling 0.2% in the last month, but still up 44.2% since the pandemic began in March 2020.

Long-term prospects for Australian property markets (2025-2030)

With property values rising by more than 20% in most locations around Australia during the boom of 2020-21, affordability started to bite, particularly in lower socio-economic areas and in our two big capital cities.

Note: Australian properties have never been cheap - and they never have been if you want to live in great locations in any major world-class city.

As I have already suggested moving forward our housing markets will be fragmented as certain demographic segments will find the rising cost of living due to inflation and higher rents or higher mortgage costs at a time when wages are not keeping up with inflation will either stop them getting into the property markets or severely restrict their borrowing capacity.

Currently, there are about 26 million Australians and Australia's population is forecast to rise to 29 million people by 2030.

This means 3 million more people will need somewhere to live and this will underpin our property markets

In early 2021 the Government released the Intergenerational Report (IGR) to help Australia and the businesses plan for the next 40 years.

The IGR projects an Australian population of 38.8 million by 2060-61, and even though this is a little lower than previous projections – due to Covid slowing things down - this still means Australia’s population is projected to grow faster than most other developed countries.

Despite the reduction of the projected population, these trends are truly monumental.

If you think about it, it’s taken Australia well over 200 years since European settlement to reach a population of 25.5 million people today.

But in the next 40 years, our population will increase by around 13.3 million people.

In other words, it will increase by over 50%!

To make this worse, currently, there are 2.5 people in each household, but the IGR forecasts the average number of people in each household will shrink a little moving forward, meaning we are going to require about a third more real estate than we currently have.

To deal with the projected population growth between now and 2061 it’s likely we’re going to require one new property built for every two properties that currently exist!

All this means our way of living is going to change considerably and town planners will struggle to cope with this growth.

So when we think about the real estate forecast for the next five years in Australia, we have to think about how population growth will impact property investment choices.

And how strategic, knowledgeable investors will be well-placed to capitalise on the changing trends.

What we predict for Australia’s property market is that there will be many more high-rise towers of apartments, not just in the CBD but in our middle-ring suburbs.

In fact, we are already starting to see this, particularly in Melbourne and Sydney. 

And we also expect there will be lots more medium-density housing – in particular townhouses will be a popular way to live with modern large accommodation on more compact blocks of land.

Great, so what are the predicted house prices in 2030 Australia?

It would be foolish to try to forecast property prices moving forward because no one really knows what’s going to happen to inflation and interest rates.

But what we can see is that as more of us want to live in the large capital cities of Australia (and in particular in those locations close to the CBD or the water) where there will be more manatees, and the scarcity will only push the price of properties upwards.

Other questions I often get asked

Is there a property bubble in Australia?

This question was commonly asked last year when we were in a property boom and some so called "experts" were warning that we could be in a property price bubble about to burst.

But, there’s a huge difference between property booms and price bubbles.

Bubbles invariably bust and when they do, housing prices end up much lower than where they started.

Property booms on the other hand, eventually run out of steam with an occasional small price correction followed by a prolonged period of little to no growth.

The issue is that they both look the same at the start.

So what’s the difference between a boom and bubble? 

It’s the type of buyers causing the growth.

Buying demand from investors grows when prices rise and the more that they increase, the more that investors want to buy properties.

Whereas owner-occupier booms take place despite price growth and the more that prices rise, the more that demand slows down and then stops as prices become unaffordable.

Only investor led booms can become bubbles.

Investor led booms can become bubbles because investors don’t buy properties to live in, like owner-occupiers do.

Profit is their only consideration, and fear of loss their only concern.

This means that when price growth slows down or stops, investors start to put their properties on the market and try to sell.

When the number of properties for sale exceeds buyer demand, prices start to fall.

Panic starts to set in as more and more investors try to sell and because no one wants to buy, the bubble busts.

So, are we in a property bubble?

No.

Because the property boom seen in 2020-21 was a result of buyers taking advantage of extremely low interest rates and government incentives designed to keep our economy afloat amid a slowdown.

These were mainly owner-occupier buyers looking to upgrade their existing property or even those looking to jump on the property ladder sooner than planned to take advantage of the cheaper borrowing costs.

This was not an investor led speculative bubble.

Owner-occupier booms merely slow down and when they end prices don’t crash, because the purchased properties are now people’s homes.

When buyer demand comes to an end, there’s no motivation to sell.

Only those homeowners who really need to move for personal, family or business reasons will do so.

Property booms can occur anytime and anywhere that the demand for housing outpaces the supply, but only investor led booms can turn into bubbles (but usually don't).

Should I buy a house now or wait until 2023 or 2024?

For some of you who are reading this right now, 2023 will absolutely be the worst possible time you could consider buying a property.

There is the spectre of higher interest rates, the continual media coverage predicting falling property values and an imminent property crash (which by the way is wrong) and geopolitical tensions around the world.

In fact for some people, moving forward with a real estate purchase this year would have the potential to cripple them financially, not just now but well into the future.

But the reality is that for investors, there is no ‘best’ or ‘worst’ time to buy property.

Here’s why…

Property investment is a process, not just an event.

So rather than just talking about going out and buying a property in 2023, or how to time the market to best purchase a property, the right time for you to consider investing is when you have all your ducks in a row and it suits your finances and your long term plans.

This means you have:

• A strategic property plan, so you know where you're heading and what you need to do to achieve your financial goals,
• Set up the right ownership structures to protect your assets and legally minimise your tax, 
• A robust finance strategy with a rainy day buffer in place to buy you time

Is it worth buying a house in Australia?

In terms of capital growth, it might not have the speed of crypto or stocks, but in terms of delivering consistent results over time, Australia’s real estate is a spectacular investment.

Australia’s property market has consistently delivered results over time.

In fact, Australia’s property boom saw 5 Aussie cities placed in Knight Frank’s global top 20 for prime property price growth in 2022.

International property consultancy Knight Frank’s Prime Global Cities Index Q1 2022, crowned the Gold Coast as Australia’s top-ranking prime property market thanks to robust property price growth.

The city ranked in 7th place with a 19.3% annual hike in prime property prices.

Sydney came in close behind in 9th place with a 16% increase in prices while Brisbane and Perth came in 12th and 13th place with respective 11.3% and 11% increases.

Melbourne also made the top 20 list in 14th place with a 10.9% annual price growth.

You may also be interested in reading:

• How to Choose a Property Advisor
• This week’s Australian Property Market Update
• Latest Australian Property Markets News and Forecasts
• Why 2022 is the WORST time to buy property
• Everything you need to know about the state of Australia's property markets in 17 charts

About Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au

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