"The events these past couple of years have come as a surprise to all of us, but now that we are at the tail end of COVID-19, professionals can once again provide reliable predictions for the future." - Marco Zande, Strategy Executive
What's the outlook for the Australian property markets for 2022 and beyond?
This is a common question people are asking now that the housing market has transitioned from an upswing generally characterised by a strong and broad-based rise across the regions of Australia, to one best described as multi-speed.
At one end of the spectrum are Australia’s two largest cities, Sydney and Melbourne are recording flat to falling housing values, while at the other is Brisbane and Adelaide, where the quarterly pace of growth continues to rise at an annualised pace of more than 20%.
We've moved into the next stage of the property cycle which has been pulled forward by an earlier and more aggressive interest rate tightening cycle.
The RBA's policy shift comes in 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 mean the RBA needs to move more quickly on rates – taking them from COVID 'emergency' lows to more 'normal' levels.
What will happen next to our property market will be largely shaped by the speed and extent of 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.
The total value of Australia’s residential property market recently surged to $9.9trillion after growing at the fastest annual pace on record last year.
Residential property prices rose 23.7 per cent through 2021, meaning that the collective value of the wealth of property owners increased by $2 trillion in just one year alone!
Now I know some potential buyers are asking "How long can this last? Will the property market crash in 2022?"
They must be 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.
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.
Now don't get me wrong...
Property values will keep rising in 2022, but not everywhere and not to the same extent as they have over the last two years.
Last year was unusual as property values increased almost everywhere at the fastest annual pace on record and the total value of the residential real estate in Australia grew by almost $2 trillion.
However, moving forward the rate of property price growth will slow and there are several reasons for this including:
In other words, not all locations will continue growing strongly moving forward.
While affordability constraints will limit property price growth in Sydney and Melbourne, the smaller capital cities are still likely to perform strongly.
But more than that within the city capital growth will be fragmented - I can see properties located in the inner and middle-ring suburbs, particularly in gentrifying locations, significantly outperforming cheaper properties in the outer suburbs.
While the outer suburban and more affordable end of the markets have performed strongly so far, affordability is now becoming an issue as the locals have had minimum little wage growth during the time when property prices have boomed.
In these locations, the residents don’t have more money in their pay packet to pay the higher prices the properties are now achieving.
More than that, Covid19 has adversely affected low-income earners to a greater extent than middle and high-income earners who are likely to recover their income back to pre-pandemic levels more quickly, while many have not been hit at all.
Another trend that is emerging is the top end (luxury end) of the property markets is driving the market weakness.
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.
Those who can afford it 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.
Australia is experiencing a rental crisis.
Increased rental demand at a time of very low vacancy rates will see rentals continue to rise throughout 2022.
Then when our international borders reopen 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.
Yet despite the lack of immigration over the last few years, just look at how rentals rose - especially for houses.
And as rising house rentals will create affordability issues for many tenants, apartment rentals will also increase in 2022.
Freed from the constraints of needing turn to to a CBD office each day, and sick and tired of being locked down in our southern states many Aussies migrated to South East Queensland last year.
And now that our borders have opened up and considering the price differential and the perceived lifestyle benefits it's likely that the northern migration will continue into 2022.
Add to this positivity off the back of employment growth and the long term benefits of hosting the Olympics and the extra infrastructure building that will occur, this part of Australia is looking particularly positive.
Our economy will keep growing and the unemployment rate should fall even though many new jobs will be created as our economy improves.
As rents rise and the share of first home buyers drop, strategic investors with a realistic long term focus will return to the market.
The rapidly changing inflation and interest rate situation has impacted the outlook for Australia's housing markets, pulling forward and steepening the forecast price slowdown.
Most economists expect the RBA to lift the cash rate to 2.25% by May 2023 , a much earlier and more aggressive tightening than envisaged at the beginning of the year.
This has caused some concerns regarding mortgage stress leading the regular band of Negative Nellies to say suggest this will lead to forced sales and driving down our property market.
However I believe this is unlikely for a number of reasons:
You may remember that at the beginning of the Covid pandemic economist from Australia's 4 big banks predicted our property markets would crash with house prices plummeting anywhere between 10 and 15%.
Of course, they were wrong.
They have once again amended their forecasts with our 4 Big Banks suggesting that interest rates will rise faster than rather than later cooling our property market throughout 2022 and then property values will fall in 2023.
On the other hand, Dr Andrew Wilson, Chief Economist of My Housing Market, made the following property market forecasts for 2022.
He recently commented that CBA’s predictions of a potential 10% price fall in 2023 due to rising interest rates were " Simply Ridiculous."
Remember the current upturn phase of the property cycle really only commenced in October 2020.
Normally the upturn stage of the property cycle lasts a number of years and is followed by a shorter boom phase which is eventually cut short by the RBA raising interest rates or by APRA introducing macroprudential controls to dampen the exuberance of property investors and home buyers.
However, this time around we have experienced an unprecedented rate of growth seeing our property markets perform even more strongly than anyone ever expected, with the rates of house price growth at levels not seen for a number of decades.
While a lot has been said about the +20% increase in property values many locations have enjoyed so far this cycle, 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?"
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.
Our property markets are just going to move out of the sixth gear into the third or fourth gear – they are not going into reverse.
What is really holding back the market currently is affordability with house price growth getting well ahead of wage growth.
Yet our housing markets just keep bounding along...
Let’s have a look at a number of property trends that I think will occur in 2022.
1. Property demand from home buyers is going to continue to be strong
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 (fear of missing out) was a common theme around Australia’s property markets.
Now that overall growth in our property markets has slowed (no prices aren't going backwards – growth is just slowing) buyers are 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 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 going to keep keeping on.
2. Investors will squeeze out first home buyers
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 and property values rise.
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.
3. Property Prices will continue to rise
While many factors affect property values, the main drivers of property price growth are consumer confidence, low-interest rates, economic growth and a favourable supply and demand ratio.
As always, there are multiple real estate markets around Australia, but in general property values should increase throughout 2022, but at a much slower rate than last year.
However certain segments of the market will suffer due to affordability issues, as will the city apartment towers and accommodation around universities until we get the influx of migrants and international students that the government is encouraged to return to Australia.
But overall, Australia’s low mortgage rates continue to underpin very strong growth in property prices throughout the country.
4. 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.
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.
5. This is a cycle dominated by upgraders
The current property and economic environment, plus the scars left on many of us after a year of Covid related lockdowns have meant that Aussies are looking to upgrade their lifestyle.
Currently, there are about 25.5 million Australians and in early 2021 the Government released the Intergenerational Report 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.
Of course, this will impact property investment choices, but strategic, knowledgeable investors will be well-placed to capitalise on the changing trends.
What this means is there will be many more high-rise towers of apartments, not just in the CBD but in our middle-ring suburbs – we are already starting to see that, particularly in Melbourne and Sydney. And 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.
It would be foolish to try moving forward because no one really knows what’s going to happen to inflation and interest rates, but 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, the scarcity will only push up the price of properties.
Despite all its challenges, the Australian economy expanded 3.4% Quarter on Quarter in Q4 2021, shifting from a 1.9% fall in Q3.
This was the strongest pace of growth since Q3 2020, mainly boosted by a sharp rebound in household spending as the economy emerged from COVID-19 lockdowns.
Household consumption bounced back strongly, buoyed by spending on both goods and services with recreation and culture, cafes & restaurants and clothing experiencing strong rises.
Meantime, government spending growth eased sharply (0.1% vs 3.8%); while private investment fell for 1st time in 6 quarters (-1.4% vs 0.7%), amid shortages of labour and construction materials.
Also, net external demand contributed negatively, with exports falling 1.5%, due to mining commodities and travel services; while imports dropped 0.9%, driven by consumption and capital goods. On a yearly basis, the economy grew 4.2%, after a 3.9% rise in Q3 and above the consensus of 3.7%.
Of course, there isn't one Australian property market, or one Melbourne or Sydney property market so certain segments of the market will outperform.
As opposed to last year, moving forward housing market growth will be more fragmented.
Moving forward some areas will strongly outperform others.
The coronavirus pandemic has forced all Australians to reevaluate how we live our lives.
Offices were shut, lockdowns were in place, and moving forward people are likely to continue working at home more than ever.
This means gone are the days where our ‘home’ was simply the place we rest our heads and enjoy some downtime between work and our social lives - the coronavirus social distancing has put an end to life as we once knew it.
If social distancing and the Covid-19 environment have taught us anything, it has taught us the importance of the neighbourhood we live in.
If you can leave your home and be within walking distance of, or a short trip to, a great shopping strip, your favourite coffee shop, amenities, the beach, a great park, the recently implemented coronavirus restrictions might seem a little more palatable than if you had none of that on your doorstep.
That's why choosing the right neighbourhood is important for property investors?
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 off’s and won’t make a long-term difference if your property is not in the right location because you can’t change its 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.
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 20 minute's walk or drive are likely to outperform in the future.
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.
A good neighbourhood means different things to different people, but there are some key factors that help to determine which locations have the potential to grow in value faster in the future.
Generally, a good neighbourhood is determined by the physical location, suburb character, and its close proximity to amenities such as a shopping strip, park, coffee shops, education, and even some jobs.
It’s obvious then that in our new ‘Covid’ world, people will want to be in a location where everything they need is in short 20-minute proximity - whether that is on public transport, bike ride or walks - to their home.
In planning circles, this concept is known as the ‘20-minute neighbourhood’.
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.
Rising property prices are the result of 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….
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 to 180,000 new dwellings each year to accommodate all the new households.
Since 60% of our growth is dependent on immigration, in the short-term population growth will fall, but it should increase again as soon as overseas immigrants will be allowed to come to our shores.
However, more and more ex-pats are returning to Australia.
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
With property values rising by more than 20% in most locations around Australia last year, affordability is starting to bite, particularly in lower socio-economic areas and in our two big capital cities.
But 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.
Yet now first home buyers are starting to feel the pinch due to the impact of high and rising home prices.
The latest results for the February quarter from the My Housing Market First Home Buyer Home Loan Affordability Index however reveal a slight improvement in national affordability.
The My Housing Market First Home Buyer Home Loan Affordability Index measures the proportion of the average income required for the average first home buyer home loan repayment and is derived from ABS statistics.
The higher the Index value the less affordable first home buyer home loan repayments.
The national First Home Buyer Home Loan Affordability Index fell marginally by 0.2% over the February quarter but remained 10.0% higher than recorded over the February quarter of 2021.
In the medium term, property values will be linked to the extent that which our economic recovery affects income, employment, borrowing capacity, and credit availability.
However, I’m comfortable with the underlying long-term fundamentals supporting our property markets in the medium to long term.
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.
The oversupply of dwellings previously experienced in many Australian locations has now disappeared and there are very few new large projects on the drawing board.
Considering how long it takes to build new estates or large apartment complexes, we’re going to experience an undersupply of well-located properties in our capital cities in the next year or two.
The prevailing low-interest-rate environment is making it easier to own a home, either as an owner-occupier or investor.
Sure interest rates are rising, but they are still comparatively low
Sure many people live in a multigenerational household, but pretty soon Millennials will make up one-third of the property market and their households tend, in general, to be smaller as are the households of the booming 65+ year old demographic.
More one and two people households mean that moving forward, we will need more dwellings for the same number of people.
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.
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.
There is currently a very low rate of mortgage default of mortgage to increase.
Sydney housing market conditions have continued to ease, with housing values down 0.5% over the last quarter.
A year ago, Sydney housing values were rising at a quarterly pace of 9.3%.
The weaker conditions can also be seen in less transactional activity, with our estimates of home sales down almost 40% compared with the March quarter a year ago, albeit with some likely disruption from the latest wave of COVID and weather-related events on the housing market’s activity.
The number of homes available for sale has been trending higher as demand slows and the flow of new listings tracks at above-average levels.
At the end of March, there were 7.5% more homes available for sale than at the same time a year ago, providing buyers with more choice and less urgency in their decision-making.
However, more investors are getting into the Sydney market now recognising that while there are no bargains to be found, in 12 months' time the properties they purchased today will look like a bargain.
Melbourne housing values recorded falling 0.1%, marking the fourth month in a row where housing values have been flat to falling.
The weaker conditions come as advertised stock levels rise to 8% above the previous five-year average in March and estimated sales activity reduces to around 9% below the five-year average.
With higher inventory levels and less competition, buyers are gradually getting some leverage back.
Homes are taking about a week longer to sell compared with last year, vendor discounting rates have picked up a little and auction clearance rates have faded to be consistently below the 70% mark.
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 increase strongly again in 2022, like all our capital cities there is not one Melbourne property market, and A-grade homes and investment-grade properties are likely to outperform.
Brisbane remains Australia’s strongest capital city housing market, with housing values rising 2% over the past month to be almost 30% higher over the past year.
Housing values rose 2% over the past month - in dollar terms, nearly $15,000 was added to the Brisbane median value over the month of March.
And even though growth is slowing in other parts of Australia, Brisbane's housing markets is continuing to perform strongly this year.
Sure it recently suffered from devastating floods, but history shows the resilience of the Brisbane property market which bounces back quickly.
It seems the floods acted as a circuit breaker for the white-hot Brisbane housing market, but our on the ground experience at Metropole Brisbane is that the market is still going gangbusters.
There just are not enough new properties coming onto the market for sale to satisfy the many home buyers and investors wanting to buy in Brisbane.
Advertised inventory levels remain extremely tight across Brisbane, with total stock levels holding 42% below the previous five-year average.
At the same time, home sales through the March quarter were estimated to be 38% above the five-year average.
Every sub-region of Brisbane has seen housing values rise by more than 20% over the past twelve months, however, it is the coastal markets of South East Queensland where growth has led the state, with housing values surging 32% higher over the year across the Sunshine Coast and 30% higher on the Gold Coast.
The long term outlook for Brisbane's housing markets is also looking positive, with a strong demographic trend fuelled by interstate migration, a large infrastructure budget, and a burgeoning level of excitement following the announcement that Brisbane would host the 2032 Olympic games.
Similarly, popular areas of the Gold Coast and Sunshine Coast have enjoyed strong demand considering the increased flexibility of being able to work from home and commuting to the big smoke less frequently.
At the same time, property investor activity has been strong, particularly for houses, 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.
In summary...
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.
At the same time we are getting more enquiries from interstate investors there we have for many, many years.
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.
Perth's housing market has caught a second wind, with the rate of growth in housing values running counter-cyclical to the other state capitals.
Momentum has been building since the rate of growth moved through a recent low at the end of last year when the quarterly rate of growth virtually flatlined at 0.4%.
The trend rate of growth has since lifted to 2.4% over the most recent three months and the monthly growth rate of 1.1% was at its highest level since May last year.
As the year progresses I wouldn’t be surprised to see an outflow of residents from Western Australia.
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.
Gross rental yields in Perth are the highest for all capital cities at 4.2 per cent for houses and 5.5 per cent for units.
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 WA house prices.
Without structural changes to the W.A. 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 was the darling of speculative property investors and the best-performing property market in 2017-8, and while dwelling values reached a record high in February 2020, its boom was interrupted by Covid-19.
Hobart property values are moving up again with values up to new record levels of 27.7% over the past year.
Adelaide housing values rose another 1.9% in March, taking the median dwelling value to approximately $603,000.
The monthly rise was the second-highest gain of any capital city, after Brisbane.
One of the key factors pushing up prices is the ongoing shortage of advertised supply.
Total advertised listings are more than 40% below the previous five-year average, while total sales were estimated to be 53% above the previous five-year average through the first quarter of the year.
Part of the attractiveness of Adelaide is the relatively low housing prices.
With a median house value of $740,000 lower relative to Sydney and $340,000 lower than Melbourne.
Source: Property Update
Yardney, M. (2022, May 21). Property market forecast 2022 — House prices predictions from expert. Property Update. https://propertyupdate.com.au/property-predictions-for-2022-revealed/
