Market recovery in the second half of 2023 could be short-lived, report says
Most capital cities across Australia saw price gains in the first half of 2023, signalling a property market rebound, but with significant headwinds expected through the second half the year, any recovery could potentially become short-lived.
This was according to Herron Todd White, in its latest Month in Review report, where it identified the latest movements and trends for property markets across Australia.
Ben Esau (pictured above), national director of residential at HTW, said despite the Reserve Bank’s wait-and-see approach with regards to OCR hikes, most commentators believed there were more rate hikes to come in the near term – a position that were in line with major lenders, who have recently flagged rising mortgage stress among their borrowers.
“There has been a lot of discussion around the number of borrowers coming off attractive fixed rate loans and onto significantly higher variable rates throughout 2023,” Esau said. “Perhaps the impact will not be as immediate as some had predicted given borrowers have already demonstrated their resilience.
“It does beg the question, however, as to how long they can hold on at these new rates and with the threat of further imminent rises. The lag effect of interest rate increases may not just be the time taken for the new rates to be implemented by lenders but also how long stressed homeowners can stay liquid after the shock of this rate rise cycle. This may also escalate if we see any significant increases in unemployment over the next six to 12 months.”
Esau said borrowers were closely being watched for signs of mortgage stress, including via reduced savings and spending, rising arrears, and increased property listings, with new listings a potential addition to the list of key metrics to watch out for throughout the second half of the year, as they’re currently below long-term averages.
“If we see increases – particularly in certain geographic or market sectors – this could lead to sharper declines in values,” Esau said. “While the tight rental market may help absorb listings, buyers will continue to see their purchasing power diminish with higher rates impacting serviceability requirements.”
Property values continued to face challenges, but with rental shortage tipped to remain unresolved in the short term, it’s impacting both tenants and CPI (inflation), the report said.
“Rental price increases are putting pressure on tenants,” Esau said. “Calls for greater tenant protections are likely to amplify and rising interest rates will continue to put pressure on mortgaged landlords to pass these costs onto tenants.
“Increasing supply initiatives such as affordable housing projects and converting commercial buildings into residential will not provide any immediate relief. As policymakers continue to look for short-term solutions to the rental shortage, we expect to see more focus on short-stay rentals and vacant investment properties … particularly within metro localities.”
Such policy changes, he said, would aim to disincentivise short-term usage or vacancies as well as push this stock back into the long-term rental market.
“Whilst these types of initiatives in isolation won’t solve the problem, they may provide opportunities to demonstrate progress against a backdrop of growing public concern,” Esau said. “That said, they may well disincentivise investors away from residential property too – not something we want in these tight markets.
“All in all, the next phase of our post-pandemic economy has created a precarious remainder of 2023 for the residential property market.”
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