Rainbow Property Valuations logo
Australian houses and apartments

Trends Impacting Australian Property Values

Factors Influencing Residential Real Estate Prices

The Australian property market has seen significant fluctuations in recent years. With housing being the largest asset class for most Australians, understanding the key drivers impacting property values provides insight into future trends. While location, individual property characteristics and market sentiment all play a role, broader economic factors largely determine overall property market conditions and price movements.

Interest Rates and Access to Credit

Interest rates and mortgage lending criteria set by the Reserve Bank of Australia and commercial banks have an enormous influence on property prices. Lower interest rates allow buyers to service larger loans, increasing purchasing power and demand. When interest rates or lending standards tighten, the opposite effect occurs. With rates currently sitting at historically low levels, access to credit has been supporting property price growth. However, with inflation rising, many experts predict interest rates will continue to be raised in 2023 – potentially cooling demand.

Population Growth and Housing Supply

Australia has experienced rapid population growth in recent years, largely from immigration and natural increases. With housing supply slow to respond, this fundamental mismatch between demand and supply puts upward pressure on prices. While COVID-19 severely curtailed immigration, Australia’s population is projected to continue growing. Ensuring adequate housing construction, particularly in Sydney and Melbourne where supply constraints are most acute, will be key to balancing demand.

Investor Activity

Investment in residential property has long been a popular wealth creation strategy for Australians. Periods of strong capital growth driven by factors like low rates spur increased investor demand. In recent years, tighter lending criteria and lower tax incentives have deterred investors. With investors currently accounting for around 25% of mortgages, well below past peaks, some recovery in investor activity could place upward pressure on prices.

Economic Conditions and Consumer Confidence

The performance of the broader Australian and global economy impacts confidence and wealth. Periods of recession and high unemployment weaken housing demand and lead to price declines, while strong economic conditions and high consumer confidence allow prices to rise. While pandemic disruptions saw prices fall initially, the subsequent rapid rebound in the economy prompted a housing boom. Sustained, stable growth in employment will be key to maintaining confidence.

Global Investment in Australian Real Estate

Australia’s stable political environment and strong economic credentials make it an attractive destination for global property investment. Foreign buyers have been a significant source of housing demand and price growth, especially in Sydney and Melbourne. While foreign investment has been curtailed recently by restrictions and closed borders, overseas demand is expected to recover as conditions normalise post-pandemic.

Government Policy and Regulation

Public policy reforms and regulatory changes aimed at improving housing affordability also affect property price dynamics. These include adjustments to land planning and zoning rules that boost supply, changes to tax policies like negative gearing and stamp duties, and reforms to foreign investment policy. While reforms to improve affordability could potentially dampen investor demand, ultimately supply constraints need to be addressed to achieve sustainable moderation in price growth.

The Outlook for Australian Property

Looking ahead, while some factors point towards continued price increases, such as low rates and still solid demand, there are also mounting headwinds emerging that may constrain growth. Risks of rising interest rates and inflation coupled with slowing economic growth both domestically and globally could reduced demand and lead to greater price stability. However, with underlying supply shortages across major cities, any broader correction is likely to be relatively moderate. Ongoing strong population increases will also continue to drive underlying housing demand. Each region has its own nuanced property markets dynamics, but national trends around interest rates, credit conditions and economic factors seem likely to dictate the overall direction.