In my last article , I covered off some points that indicated a significant contraction in Australia’s property market. In this article I will point to some of the indicators that would suggest we may experience a ‘soft’ correction or even a recovery in property values. While the most likely outcome is a contraction, as noted in my previous article, we nonetheless should be on the lookout for any change in conditions or sentiment that may signal a turning point.
Economic Fundamentals – Lower Unemployment and Underemployment Rates
Inflation is at historic highs, reaching 7.3% in Q3 of 2022. High inflation is due in part to the impacts of COVID-19 on supply chains and geopolitical events like the war in Ukraine which impacts cost of energy. While high inflation does have a negative impact on household expenditures which may in turn limit the demand for property, there are other economic metrics that could indicate a soft correction in the property market in 2023.
As of January 2023, the Australian unemployment level currently sits at 3.5%, which is near historic lows. For contrast in July 2020, the unemployment rate reached a peak high of 7.4%. The RBA forecasts the unemployment rate to reach 5.1% by the end of 2023, dropping to 4.5% by the end of 2027. While forecasts indicate a bearish employment environment, it is still preferable to the 7.4% unemployment rate reached in July 2020.
Further, underemployment is at 6.1%, which was at 8.7% before the pandemic. This means that there are less people who are employed at less than full-time or in jobs that are inadequate when contrasted to training and economic needs.
Employment plays a role in managing loan serviceability by ensuring that mortgage arrears are kept in check. Given that unemployment levels are near historic lows, this is an encouraging sign that most homeowners have an income source to divert to their loans and prevent selling their homes from being unable to service their loans. Further, the less that people are underemployed, the more likely it is that people can earn enough income to satisfy their needs.
International Migration to Australia
COVID has been the catalyst for countries including Australia to close off their borders to international migration. This has resulted in a contraction of net migration to Australia, which experienced a net loss of 85,000 people in the 2020-21 financial year, and a net gain of 171,000 in the 2021-22 financial year. In other words, net migration increased by 86,000 only, over two financial years. For contrast, from 2019‑20 (pre-COVID), Australia’s population increased by 194,000 due to net overseas migration[1].
With the relaxing of immigration policies post-COVID lockdown era, the 2022-23 Budget has since forecasted net migration to reach 235,000 in 2023, with the Federal Treasurer indicating that these forecasts are likely wrong and that the real net migration figure is expected to be much higher, possibly reaching 300,000[2].
The likely increase in overseas migration to Australia may bring a positive effect on house price changes especially in metropolitan areas such as Sydney, Melbourne, and Brisbane. Prior research has indicated that a 1% increase in the population, in-part fueled by international migration, leads to a 0.9% increase in housing prices[3]. An increasing population due to migration not only increases the demand for housing, but also encourages the appetite to build new homes to accommodate demand.
Strong Rental Market
While the relationship between higher rents and housing prices is complex, it can lead to upward pressure on property prices. Annual growth in Australian rental values rose 10.2% in the 12-months leading to December 2022[4]. This is primarily driven by rental growth in Sydney, Melbourne, and Brisbane[5].
With increasing rents, landlords are incentivized to invest in their properties to improve or maintain rental incomes. Property investments could include upgrades or renovations which not only improves rental yield, but also improves the overall sale price of the property, should the landlord look to sell.
A strong rental market may also drive-up demand for property as an investment vehicle. New and existing property investors may see opportunities from a market that has contracted around 10% in the 12-months leading to January 2023. These investors may be inclined to bid up the price of properties to obtain higher rental yields in a market with high demand for residential dwellings but a lack of supply. Similarly, renters with financial means may be incentivized to purchase their own properties to break away from having to pay increasing rents, increasing the demand for property.
Interest Rates and Inflation
Housing prices are impacted by uncertainty. Particularly impactful to housing prices is uncertainty surrounding interest rates and inflation. As things currently stand, the RBA has indicated that there will be further interest rate rises. Inflation, whilst appearing to have stabilized, is still near recent highs and may not reach pre-COVID levels for a while yet. The lack of certainty around interest rates and whether it will continue to rise, and whether inflation is finally on a downward trajectory, impacts buying behavior. In this case, people may be delaying the purchase of a property until market conditions improve. On the other hand, if there is news that the RBA will keep interest rates on hold, or inflation has reached its peak and is predictably softening to pre-COVID levels, this may entice people to get into the property market to take advantage of more favorable market conditions.
[1] ABS Migration Data (December 2022)
[2] Financial Review (January 2023), ‘Immigration could surge to 300,000 in 2022-23
[3] Moallemi and Melser (December 2019), ‘The Impact of Immigration on Housing Prices in Australia’
[4] Corelogic (January 2023), ‘Monthly Housing Chart Pack’