Whatever happens in the housing market next year, renters and borrowing families will be the biggest losers.
SQM Research director Louis Christopher has released his latest annual Housing Boom and Bust Report and, while home values look like finally heading south in most capitals, borrowing power will follow suit thanks to the cash rate remaining above 4 per cent and possibly pushing higher. And as for asking rents? The only way is up.
SQM expects asking rents to rise between 7 and 10 per cent across capital cities in 2024, with Perth leading the way at 12-15 per cent.
Sydney and Brisbane renters can expect to be paying up to 10 per cent more than they are currently while Melbourne tenants face rises up to 9 per cent and Adelaide up to 7 per cent.
“Asking rents are not affected by rising interest rates like prices are,” Mr Christopher said. “The forecast is for 153,000 new dwellings to be constructed over 2024, while our conservative forecast is for the population to expand by 460,000. Those two numbers do not add up. They don’t go together well at all for renters and the rental crisis will not be going away in 2024.”
The overseas migration effect
Unlike a real house, the roof of Australia’s property market has been held in place by two walls over the past 12 months; undersupply of stock and population growth.
The above ratio of new properties being built, to people entering Australia has turbocharged the lack of supply, not just of rentals, but also properties for sale.
In Australia, property is our favourite asset and we often praise its resilience, but values would likely have fallen by much more already if we had enough supply.
While Federal Labor has spruiked a plan to facilitate 1.2 million new homes built over the next five years, the reality is that it’s simply not going to happen.
If SQM’s forecast of 153,000 properties constructed next year is accurate, Labor will already be close to 90,000 properties behind target in the first year.
One basic way to increase supply would be to reduce migration.
“If you cut the migration rate by 100-200,000 and got it down to say, 250,000 and still have the current number of new dwellings constructed, that would create some relief in the market,” Mr Christopher said.
Should migration not slow down as expected, but rather remain above 500,000 for the year, Mr Christopher says housing prices may not experience a correction, but rather a “slight rise for the year”.
Canberra gives supply insight
For an idea of what more supply would do to values, look no further than Canberra, which is the outlier for capital markets.
Mr Christopher notes it is one of the very few places currently recording accelerated supply. The result is that he forecasts it will record the largest price falls out of all cities, with up to 8 per cent slashed from values in his base scenario. Those losses could hit 10 per cent plus if the cash rate rose above 5 per cent and unemployment above 6 per cent.
Mr Christopher also forecasts rents to fall by up to 6 per cent in Canberra.
How high could rates go?
Mr Christopher always presents multiple scenarios in his annual report, which obviously increases his chances of getting it right. Though none of his scenarios sees the cash rate back below 4 per cent next year.
His base case (or most likely scenario) sees a cash rate ranging between 4.1 and 5 per cent in 2024, meaning it could continue to rise, or we could see one rate reduction, “most likely towards the end of 2024”.
The base case also sees population growth slowing to 460,000 (down from 570,000 in 2023) or less and unemployment rising to between 4.5 and 5.5 per cent.
Mr Christopher believes this scenario would see value losses of up to 4 per cent in Sydney and 3 per cent in Melbourne. Canberra and Hobart would suffer falls of up to 8 per cent and 7 per cent respectively, while Adelaide values would be flat. Perth would be the winning market with growth of 5 to 9 per cent, while Brisbane could expect 4 to 8 per cent positive movement.
Then, there’s the ‘energy crisis’ scenario, in which a Middle East oil embargo brought on by the Gaza conflict sees inflation soar again, while the cash rate heads above 5 per cent and unemployment above 6 per cent.
This scenario would see Sydney and Melbourne values fall by up to 6 and 7 per cent respectively.
It may seem unlikely, but Christopher argues the prospect of an oil embargo is a “clear and present risk”, with precedents in the Yom Kippur War and Iranian revolution of the 1970s.
“If this happened again, you would see oil prices skyrocket,” Christopher said.
“On that scenario, central banks around the world would face a second round of accelerated inflation.
“In my view they would move aggressively to try and counter that and a cash rate of 7 or 8 per cent would be possible.”
This would mean Australia would certainly have a hard landing and go into recession, with a huge spike in forced home sales.