What 2023 revealed about Australian property, according to an economist

Now, as the real estate industry, property owners, renters, prospective buyers and sellers all make their plans for the year ahead, it’s worthwhile taking a look at what lessons might be learnt from the events of 2023.

As Dr Diaswati Mardiasmo, chief economist at PRD Real Estate, recalled, the main prediction at the start of 2023 was that there would be a crash in the market, with many areas bottoming out due to successive cash rate hikes, higher cost of living and low consumer confidence.

“Many predicted that demand would slow – though somewhat mitigated by international borders opening – and we would see less first home buyers activity. The rental market was predicted to remain tight and undersupplied, with rental prices continuing to increase, even with investors coming back into the market,” she said.

Forecasters were rewarded with the rental market behaving exactly as expected, with a substantial undersupply and higher rental prices – so much so, that as Dr Mardiasmo noted, it continues to be the stickiest housing-related price and expense in the inflation data.

“Investors did come back into the market, capitalising on tight rental markets. However, quite a lot of investors also tapped out, as their investments became no longer financially viable due to higher costs,” Dr Mardiasmo noted.

But even so, vacancy rates remained incredibly low, and the expected rise in rental prices came to pass.

In the sales market, however, prediction accuracy was far more mixed.

“In some markets prices declined, in others [prices] continued growing – albeit slower than after COVID. Sydney and Melbourne were the hardest hit,” Dr Mardiasmo noted.

Brisbane, Adelaide and the Gold Coast, however, defied early market predictions of a downturn. Many regional markets also continued to grow. Undersupply outweighed some of the strictest fiscal tightening measures the country has seen in recent memory. So even when demand slowed, it was never enough to constitute a “crash”, the economist said.

And any hint of economic predictability seemed to give waiting buyers the confidence to pounce.

“We didn’t expect a period of stable rates in 2023, which then bolstered confidence and saw demand increase slightly,” Dr Mardiasmo commented.

In her view, there are three main lessons that the industry and consumers alike might want to take from the events of this year as they make their forward property plans – whatever those might be.

1. Demand is not an issue

“Sure, we might go through some slower spells here and there, but overall, demand is not our issue. We have increased demand from overseas and international migration, first home buyers being stimulated by various grants, banks are willing to assist buyers make a purchase and have reported that there is very little arrears in mortgage payments, and many more,” Dr Mardiasmo said.

She believes that if demand slows in the period ahead, it should be thought of as a correction for getting the Australian property equation back to a “natural” level, following continued elevation from 2020.

2. Supply shortages aren’t going anywhere

With demand expected to be steady, or high, for the foreseeable future, Dr Mardiasmo stressed that Australia must focus on tactics to address supply in the short- and long-term.

“We need to boldly explore all avenues of creating housing stock – modular homes, capsule homes, 3D printing, manufactured home parks, policy and building code refresh,” to name a few.

And the economist emphasised that solutions must respond to the needs of Australians as they are playing out in the property market.

“We have found that even though there is a push for gentle density and apartment living (the “go up not out” philosophy) due to lack of space, most Australians still prefer to live in a detached dwelling. So there needs to be a two-pronged approach: one that builds apartments with community and connection in mind, and another that builds houses in a more innovative manner,” she said.

3. Focus local

“Predicting the property market has become such a personalised and localised matter, depending on the supply and demand balance of that area,” Dr Mardiasmo commented.

While buyers and sellers have always been cautioned to understand their immediate property dynamics before making a decision, it’s clear from the events of this year that prevailing narratives still hold sway in the collective consciousness, with clear behavioural shifts taking place in response to broad economic factors.

But as Dr Mardiasmo highlighted, there are many other factors to consider beyond the Reserve Bank of Australia’s decisions and national sentiment, not least of all what she refers to as the “decentralised nature of our housing strategies”.

“Each local council is able to determine what, where and how many homes will be built. The availability of labour and materials also depend on the area – whether it is easy to get to, if there is enough infrastructure, and so on. From a demand perspective, we are also very varied, depending on the demographic makeup and local policies that might impact housing decisions. We have learned that people’s financial situation varies quite a bit, even more so after COVID, thus there is a greater variance in decisions related to buying and selling than before.”