May 11, 2023 – John Ricciotti
As we settle into 2023, an analysis of the current economic environment and key trends in the real estate sector informs our outlook over the next 12 months in Australia.
Currently, a combination of economic headwinds – primarily persistent inflation and rising interest rates are responsible for market volatility, a significantly reduced building pipeline and investor caution. A moderation of these trends, supported by a return of migration, coupled with a housing shortage driving up rents, will encourage a recovery in development activity and investor sentiment. At CIM, we expect a gradual recovery of the housing market to commence next year, setting the foundations for a rebound in 2024.
The Australian residential property market has experienced a remarkable period of growth, with house prices rising almost 40 per cent from 2020 to 2022, including the price jump of over 20 per cent in 2021 fueled by record-low mortgage rates.
However, economic consensus is that the market is due for a large correction of 10-15 per cent from peak to trough, the largest in over 40 years. Considering the 5 per cent fall in residential property values in the latter half of 2022, a further decline of 5-10 per cent is expected for 2023.
This correction is different from previous tightening cycles that were aimed at addressing an oversupply in the housing market, as the market is now fundamentally under-supplied. BIS Oxford Economics forecast that apartment completions between the 2024 and 2027 financial years are expected to be 50 per cent lower than 2017-18 levels. This is supported by recent ABS data showing that housing approvals have hit their lowest level in more than a decade.
Reduced commencements are also exacerbating liquidity pressures in the construction industry, reducing the ability to refresh pipelines with new/profitable projects, whilst still completing existing projects that are marginal or loss making. Overall, the construction industry will emerge with reduced capacity, compounded by competition from Government supported infrastructure projects, Therefore, we do not see conditions emerging for construction costs to fall unless there is a deep recession.
The rapid increases in the Reserve Bank of Australia’s (RBA) cash rate during the second half of 2022 has reduced housing affordability, and with the major banks predicting the cash rate to peak in the high 3.0 per cent range by mid-2023 and remain elevated, the full impact of rate increases is starting to be felt.
The roll-off of fixed-rate terms in 2023 presents a downside risk, with the proportion of fixed-interest mortgages tripled to more than 40 per cent by the end of 2021. At present, it is estimated that over 800,000 fixed-rate mortgage loans will roll onto variable rates in 2023. As a result, $500 billion of mortgages will experience mortgage shock as refinancing rates triple to over 6 per cent and higher.
Although Australia is expected to narrowly avoid a recession in 2023, there is still a downside risk from elevated interest rates impacting businesses and consumers, increasing unemployment which could accelerate price declines due to forced sales. In previous housing cycles, the cutting of cash rates by the RBA has stimulated housing activity, the markets are forecasting this to occur around mid-2024, a key turning point we are monitoring.
Recent instability in the US banking system and impact on the global financial markets, whilst potentially leading to a pause or reduction in interest rises, will also accelerate a reduction in lending appetite that will make it harder for borrowers to refinance and result in increased defaults during 2023.
Population growth has rebounded quickly due to the return of migrants and foreign students (over 600,000 forecast over the next 12 months), resulting in record-low vacancy rates below 1 per cent and rents increasing by over 10 per cent in 2023. This is shifting the focus to how the housing shortfall can be addressed via supportive Government policy and changes to local planning laws. The announcement that the federal budget will support foreign BTR investors via halving the withholding tax rate and a depreciation rate increase to 4% is a step in the direction. Although the complexity of the housing issue and numerous stakeholders means that the rental crisis is likely to worsen in the next 12 months.
As a counter to these headwinds, the rebound in migration and rental trends is expected to see the return of investors and first home buyers in 2024, as housing prices stabilize, affordability improves, and elevated rents increase investment yields. This will stimulate a recovery in housing supply, driven by a return in developer confidence and the support of debt and equity investors, although it will take time for the supply shortage to be addressed as project feasibilities are funded in 2024 and supply comes online from 2025.
At CIM, we understand that the Australian residential property market is in a period of transition, and we believe that the opportunity for developers and investors remains favorable in the metro areas of capital cities, established regional cities and growth corridors. The development of the BTR market in Australia is critical to alleviating the housing shortage. Our Alphington Village BTR project, is set to deliver over 600 much needed apartments by 2026, in partnership with developer Time & Place and construction company Hickory.
We have also partnered once again with St Hilliers to provide funding for its Central Coast Development, a project targeting the regional downsizer market. Only recently, we announced our partnership with Melbourne developer Orchard Piper to transform a Toorak Village site into a mixed-use project that will include a residential offering for inner urban downsizers.
Corsair Investment Management is an independent, specialist commercial real estate investment manager offering a range of structured financial solutions for the Australian property market.
We understand the nuances and pressures of property development and investment. More than a capital provider, our focus is on service, responsiveness and adding value to the funding process.
We provide unparalleled insight into the Australian property landscape and having worked through many market cycles, our investors place great confidence in our ability to recognise outstanding investment opportunities that present attractive risk-adjusted returns.