Overinflated or set to fly? The factors driving property in 2024
Will Sydney continue to inhabit its own property universe? Can Perth, Brisbane and Adelaide deliver even more stellar capital growth? Is Melbourne the next big thing in real estate?
There have been a range of factors driving house prices this year but where is it all headed in 2024?
Let’s take a look at the four major factors driving the market’s trajectory and see how things are likely to develop in the new year.
What happened to property in 2023?
The year started with a crowd of pundits telling us home prices would fall into a trough as interest rates rose.
That didn’t really work out as you can see from the chart below. All of the major capitals posted solid returns and some have had quite good years for investors.
But that’s not to say interest rates didn’t have an effect. Perth and Brisbane don’t typically feature at the top of the table but this year they have, thanks to their lower entry prices.
If you want to see the effect of rising rates perhaps the best example is Adelaide.
Through the middle of the year, the City of Churches was regularly the leading performer but as its median price rose and the amount people could borrow was crimped by rising rates, Adelaide’s growth rate pared back.
Meanwhile Australia’s most expensive market, Sydney, had a stellar year but its growth rate was also pared back towards the end of the year.
Interest rates up for a while yet
Speaking of interest rates, it has been a year of extraordinary rises but what of the future?
We now seem to have reached a peak with only a few economists predicting another rise. Still, it has been quite something watching the housing market defy rates when history suggests prices should be falling.
From my observations, many home buyers had this history in mind, predicting rates were about to peak and home prices would begin rising if rates began to fall.
The problem with this “buy in the dips” approach is that the cost of money may not fall as quickly as it has in the past.
While rates did rise sharply, they have only gone back towards their long term average. Anyone expecting a return to 3 or 4 per cent mortgages may have a long time to wait.
That’s likely to make a mess of anyone banking on a return to rapid rises in house prices but unlikely to send the market into a dive.
As David Bassanese, Economist at Betashares, put it recently, “At best, prices seem likely to only level out rather than fall back all that much.”
Migration numbers expected to retreat
The other surprise in 2023 was immigration. While everyone was factoring in an uplift in population, what we got was more than half a million new people in Australia.
The primary driver of this was the government’s desire to spur the economy while keeping wage inflation at bay through immigration.
The problem is that the rise in population is outpacing housing supply. The news though is we’re likely to see migration wound back somewhat in 2024, closer to its long-term trend.
That would see the number of new migrants fall between 25-30 per cent. Still, all that additional demand for housing will play out, so I expect migration will remain a positive for house prices.
The economy, stupid
The point of all the rate rises was to slow the economy, but to date it’s proved resilient in clocking a 2.1 per cent rise in GDP this year.
Yet there are plenty of signs that the going has got tougher even though employment has held up well.
If we start seeing a rise in unemployment, that will likely prove a negative for the property market.
As Warren Hogan, economic adviser at Judo Bank said recently, “The Australian housing market is yet to be stress-tested by a genuine slowdown in economic activity and softness in the labour market.”
Affordability the biggest variable
Now we come to the factor most likely to drive prices in 2024. Affordability.
In this chart, we see affordability represented by how many years of income it takes to buy the average dwelling. What this underlines is the economic case for why Perth, Adelaide and Brisbane had such a good year, while Sydney seems to be operating in a market reality all of its own.
Where to for property in 2024?
What I’m telling investors is that the best place to invest your money is in areas that provide good options for young families to get into the market around the median price.
In areas like Kilsyth in Melbourne’s eastern suburbs or around Blacktown in Sydney’s west, there are good options to purchase standalone homes that offer classic outer suburban living.
These areas are likely to cash in on their affordability with relatively good demand from family home buyers.
Well positioned homes in these areas are hot property now and likely to remain so in 2024.
What these areas have in common are good transport options, established local schools and nearby parkland, but most of all, relative affordability.
Investors can count on reasonable and rising rent returns underpinned by strong demand for family housing.
Affordability will also favour units but here there are a few more provisos.
Investors need to steer away from newly built or under construction units and instead look to established apartments, townhouses or villa units in select inner and middle ring suburbs.
The best are likely to be two-bed units or spacious one-bed units offering comfortable (as distinct from cramped) living.
Overall, I expect the property market to deliver sluggish to solid growth next year.
But for buyers able to secure a well-positioned property with strong characteristics, 2024 should prove a good buying opportunity.