Market comment: SUPPLY AND DEMAND

Thu, 23 Nov 2023

Market comment: SUPPLY AND DEMANDRBA, ABS, BTR, FOMO and the Law of Supply and Demand

Domain’s property journalist Melissa Heagney-Bayliss recently asked economists from the big four banks the question “what’s the outlook for property prices in 2024?” Her conclusions from their answers were that house prices will rise between three per cent and five per cent; a lack of housing supply will keep prices high; and the November interest rate rise will be the last before cuts start later in 2024. 

So, nothing dramatic in the way of changes to Sydney’s housing prices except probably that we’ll see new records set in dwelling values from this month onwards.

Aidan Devine from also took a look ahead - two years ahead, in fact, and made his forecasts on what Australian property will do by the time 2025 is almost behind us: “Exclusive analysis of PropTrack data and KMPG property forecasts indicated much of the housing market was on course for another round of strong growth,” he said.

He adds that it’s likely the next wave of growth will raise prices in most locations well past the previous peaks they recorded in early 2022, a time when interest rates were at historic lows. His prediction for Sydney is that the average home will bring $1.53 million by 2025 and says that 42 Sydney suburbs will see a $2 million median price by the middle of that year.

KPMG chief economist Brendan Rynne told Mr Devine that a lack of supply will be one of the key property price drivers during the current financial year while developers struggle to get new housing projects off the ground: “House and unit prices will then accelerate further in the next financial year as dwelling supply continues to be limited, due to scarcity of available land, falling levels of approvals and slower or more costly construction activity,” Mr Rynne said.

He added higher demand due to migration, anticipated rate cuts by 2025, relaxed lending conditions, foreign investor demand and high rental costs to the list of price drivers, noting that house prices would grow faster than unit prices in the next couple of years.

NAB chief economist Alan Oster sees prices rising another 5 per cent next year, even if the RBA hikes interest rates again in early 2025: "We expect the board to form the view that a single 25 basis point adjustment to rates is not enough to mitigate the risks on inflation," said NAB chief economist Alan Oster.

There were signs that price growth was slowing, Mr Oster said, including an increase in listing and auction volumes that could soak up demand, meaning prices wouldn’t rise in 2024 as rapidly as they have this year. "We’re already seeing softness; therefore, we’re not expecting the current surge to continue," he said.

PropTrack economist Eleanor Creagh says there will be a “startling shortfall” between the number of people living in Australia and the number of homes for those people to live in. She references ABS figures showing a nett total of 300,000 migrants could arrive over 2023, and that Australia only completed around 170,000 new homes over the year to March 2023.

“Faster than expected population growth has meant more people are calling Australia home, against the backdrop of pre-existing housing supply issues, giving rise to a mismatch between housing supply and demand,” Ms Creagh said. “We need to increase our pace of building by almost 40 per cent from where it currently stands.”

In another effort to increase the availability of housing, the NSW government has announced it will conduct a review of short-term rental accommodation by the end of this year. There are around 43,000 short term rentals registered across the state and the government believes as many as 90,000 homes could become long-term rentals if a suitable package of benefits for owners can be devised.

About that 20 per cent price fall

This month Domain’s Tawar Razaghi asked an interesting question: “Whatever happened to forecasts of 20 per cent property price falls?” It seems almost impossible anyone might have thought such a thing, but it was a forecast not too long ago and deserves a bit of analysis.

In 2022 home prices dropped nationally from their peak by 7.5 per cent, according to CoreLogic data. The previous serious drop was in the period 2017 to 2019 when over 19 months the market fell 6.3 per cent, not quite equalling the early 1980s when a fall of 7.7 per cent was recorded over eleven months.

Sydney recorded a peak-to-trough drop in values of 12.4 per cent after hitting a high in January 2022 and finding a bottom in January 2023. Since then, Sydney’s home values have recovered 10.6 per cent and are now 3.1 per cent below their record high in January 2022.

Tim Lawless. CoreLogic’s head of research, told Domain the rate of price decline began to moderate in September 2022 when the sellers started staying away: “The key factor that kept a floor on the market was the supply side. Vendors retreated to the sidelines,” Lawless said. “Households were able to save a huge buffer and sellers didn’t need to sell on most occasions, and nobody wanted to test the market.”

Jonathan McMenamin, senior economist at Barrenjoey said they had expected in highly mortgaged markets like Sydney and Melbourne borrowing capacities would be hard-hit: “We were expecting the higher interest rates to take about 30 to 35 per cent out of borrowing capacity. But when the supply side responded as it did, the stock on the market nationally fell 30 per cent below its 10 year average,” McMenamin said. 

“It did have an effect of providing a floor to house prices. We’ve never seen the supply side respond as quickly as it did which is what caught us off guard. This forced a build-up of buyers, especially ones largely unaffected by rising rates, to compete and pay a premium for the declining number of homes for sale.”

But are the price declines really behind us? AMP chief economist Dr Shane Oliver, who had earlier forecast 15 per cent to 20 per cent price falls, told Domain that despite the strength of the recovery, the risk of a double dip still remains high.

“This environment we’re facing is probably the messiest we’ve seen,” Oliver said, noting it was a push and pull between higher rates and low supply levels. “Ultimately, it depends on which of those dominates.

“It wouldn’t surprise me if the negative influence of interest rates takes an upper hand again.”

Oliver told that the latest interest rate rise would reduce borrowing capacities by about 2 per cent, and the risk of another hike would keep buyer demand subdued, further slowing price growth.

"This will accentuate that slowing in price growth that we have seen and runs the risk that prices will turn negative again," he said.

"We’ve seen auction clearance rates slowing down, which suggests that still high interest rates have started to get the upper hand again over the huge supply shortfall we have on the back of booming immigration," he said.

"Historically when [clearance rates] fall below 60 per cent, it's associated with falling prices," Mr Oliver said.

Another believer in a possible downturn is Louis Christopher, Managing Director of SQM Research, who says: “Since the market is finely tuned it might only take one rate rise to create an additional slowdown in housing”, Christopher told The Australian Financial Review.

“The risks rise substantially [of] a period where the market goes into another downturn, assuming we get another rise”, he said.

Leith van Onselen from Macrobusiness said he doubts that the recent 0.25 per cent rate rise will trigger a price downturn: “Australia’s population is growing at a record pace at the same time as actual construction levels are falling and rents are rising swiftly on the back of record low vacancy rates. 

“The lack of stock and soaring rents has created widespread ‘FOMO’ (fear of missing out) across the market, which is driving the price gains; under these conditions, it is hard to see how a single rate hike from the RBA would derail the housing market. More likely, the pace of price growth will slow further as borrowing capacity is reduced a little.”

More interesting

We know that interest rates are still on an upwards trajectory. That’s because the RBA raised the prime rate another 0.25 per cent to 4.35 per cent on 7 November just about the time Without a Fight crossed the finish line at Flemington. This takes the rate to a 12-year high and is the 13th rate rise since May 2022.

Only about thirty per cent of Australia’s top economists had thought the RBA would take its rates even higher, but the Bank’s governor, Michele Bullock, said inflation was still a threat to our economy: “While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year,” she said. “Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country,” she said, and up went interest rates.

This will add another $100 to monthly repayments on a standard mortgage of $600,000. Federal treasurer Jim Chalmers acknowledged the impact on mortgage holders saying it would “make life harder for people who are already doing it tough”: “Now, the primary driver of inflation in the most recent data was petrol, but there are other inflationary pressures in our economy as well as the Reserve Bank is responding to that.”

Domain figures show that the mortgage delinquency rate in Sydney is now 0.71 per cent, up from 0.63 per cent in February. This means that seven out of every 1000 Sydney homeowners are at least a month behind in their mortgages. In some parts of Western Sydney the rate is as high as 2.5 per cent, meaning 25 out of 1000 mortgage holders in those suburbs are behind. 

The growth in interest rates may even be slowing the dramatic price increases we’ve seen at the top end of Sydney’s property market. The upturn in the upper quarter of the market was rising around five per cent every quarter earlier this year but CoreLogic data shows these rose just 2.3 per cent over the past three months. 

CoreLogic research director Tim Lawless said this slowing was largely driven by affordability challenges and an increase in homes for sale that have curtailed price growth: “Even within Sydney and Melbourne you can see the same trend, the upper quartile really led the [upswing] cycle in both of those cities, growth trended positive earlier … and then in the last few months it’s really clear that’s where the sharpest slowdown is occurring as well,” he said.

There are as usual no guarantees that this will be the last rate rise from the RBA, although it’s considered likely that this is that last increase for 2023. The Guardian’s Peter Hannam tells why:
“Inflation has been above the RBA’s 2%-3% inflation target range for a record 10 quarters, according to UBS. From projections made in August that goal won’t be reached until seven more quarters, and possibly later if forecasts by the International Monetary Fund – based on talks with Australian authorities – are correct.”

David Bassanese, chief economist for BetaShares, stated his forecast for interest rates: “My expectation is that the RBA will not rush into another rate rise in December but instead assess inflation and growth trends over the next few months, with a potential further rate rise in February if the [December quarter consumer price index] on 31 January remains uncomfortably high.”

Of the big four banks, only the NAB has put a figure on another rate increase that it expects to come by February when it peaks at 4.6 per cent. However, it also said the possibility of another rise at the RBA’s next meeting December 5 remains “live”.

Up not Out

NSW Premier Chris Minns has a plan to fix Sydney’s rapidly-growing housing crisis by increasing housing density instead of creating new suburbs further out from the CBD. As documentary producer Sean Murphy summarises the Premier’s strategy: “One: increase density. Two: more dwellings near public transport hubs. Three: more social and affordable housing. Four: better-designed houses and apartments. Five: do it all quickly.”

Mr Murphy also summarises what he sees as the two great hitches in the Premier’s grand plan: “Immigration and foreign investment – These are the domain of the federal government.” In other words, factors beyond a state premier’s reach that are causing so much of our housing crisis are beyond the problem Minns is trying to fix. 

A September statement by the Australian Bureau of Statistics (ABS) shows that net overseas migration added 454,400 people to this country in the twelve months to the end of March this year, with about 130,00 of those looking in Sydney for a place to live. The Australian Contractors Association pointed out what this means for housing: “any quantitative gains from migration on the supply side are offset on the demand side because every new migrant needs a new home, a little extra road to drive on, another seat at the theatre”.

We’re simply overwhelmed with demand for housing and don’t have the human and physical resources to build as much housing as our current residents and the new arrivals require, which means a growing number of people will have to compete for whatever housing is built and prices will keep rising. The old law of supply and demand can’t be repealed.

Minns has recently shown he’s not afraid to bypass or override local councils by allowing up to 8,000 new homes in Macquarie Park despite the objections of Ryde council. 3,000 of these will be built within 800 metres of the two existing Metro stations and developers will be able to add up to another 5,000 build-to-rent apartments to the surrounding area on what is deemed “excess commercial land”.

Ryde council has voiced serious objections to the plan but the state government intends to make Macquarie Park a state-led rezoning precinct – a strategy that the Sydney Morning Herald says will be replicated across an estimated seven new housing priority rezonings across the existing Metro network.

The Premier says “we’re not going to be afraid” to override council objections, and “You can expect more of this across Sydney. We’re not going to do it in an arbitrary way, but we certainly will do it where we believe it’s crucially important for the growth and diversity of Sydney…We’ve made that decision. We just think the alternative is just intolerable.”

Mr Minns has already proved he’s not afraid to step on some fairly rich and powerful toes by converting half of Sydney’s Moore Park golf course to public parkland to create green space for local apartment dwellers: "We're certainly not declaring war on golf, what we are saying is that this golf course in the heart of the CBD which is already densely populated, it's a better use to make it a park than an 18-hole golf course" was his comment.

NSW planning minister Paul Scully says the rezoning of land at Macquarie Park will support the creation of homes and jobs that are accessible to everyone in the community, adding that the rezoning will add eight hectares of new public open space, a large indoor recreation facility, along with paths for walking and cycling. There are also proposals for two schools.

Property Council of Australia NSW executive director Katie Stevenson told the Sydney Morning Herald that the existing system meant any rezoned land was unlikely to see construction completed and “keys in the door of new homes” until mid-2029 “at the earliest”.

“We cannot wait for an accelerated precinct planning process to take place over six, 12 or 18 months if we are to deliver the record levels of housing required of us over the five-year window of the National Housing Accord,” she said.

Build-to-Rent growing

Build-to-rent (BTR) continues to grow with new apartment communities under construction across the country. These are built with the idea of creating homes for renters that offer a lifestyle and community to keep residents there for longer periods of time than the usual structures built for short term rentals or resale.

Mirvac’s new LIV apartments in Sydney and Melbourne offer bond-free leases and have already proved popular with people looking for a home they don’t have to buy or otherwise can’t afford. They also allow occupants to enter into long-term leases and to access amenities such as gyms and swimming pools, and the freedom to personalise their own apartments.

Mirvac has about $1 billion worth of BTR properties now under construction nationally. Angela Buckley, fund manager – BTR sector lead at Mirvac, says BTR properties are designed as a viable option that meets people’s needs at a time of high rental costs and skyrocketing property prices: “LIV properties provide security, connection, and community, but without the rental bond payment, without interest rate rise stress, and without the land or stamp duty taxes that all make purchasing a home unobtainable for many Australians,” she said.

Perhaps most important is that BTR communities are managed in a way that encourages the people living there to share in social events, day trips, access to services such as healthcare and entertainment, and special interest groups like playing bridge or choral singing. All this naturally comes at a cost but the developers have to deliver a package of benefits that is both desirable and affordable.

Homes in BTR communities are built with quality and living comfort in mind, unlike some recent apartments featured in the news that have been found to be undersized and poorly built. BTR apartments are typically designed with modern features and layouts that appeal to contemporary lifestyles. Developers often prioritize open floor plans, energy-efficient appliances, and other amenities that cater to the preferences of renters.

The BTR sector in Australia is positioned to grow rapidly with more than 50,000 apartments set to be built by 2030, according to Colliers International, a Canada-based diversified professional services and investment management company. With both the state and federal governments committed to increasing the supply of housing in Sydney, it’s not surprising that BTR is receiving support in such critical areas as development approvals and land use zoning.

The crumbling cliff

Fears of a ‘cliff’ that would swallow borrowers transitioning from fixed rate mortgages to variable rates have largely abated with a majority of mortgages being refinanced in a way that has proved manageable for the majority of borrowers. Despite the RBA’s raising its prime rate to a twelve year high, including a jump to 4.35 per cent on Melbourne Cup Day, about half of the cheap fixed rate loans have already transitioned to higher variable rates and most of the remainder appear to have the ability to follow suit.

The RBA noted: “The majority of current fixed-rate borrowers are estimated to have sufficient income to continue meeting their obligations after moving onto higher mortgage payments. The majority also have large savings buffers.”

More than one million fixed rate loans have already been successful in moving to higher variable rates, and this number will rise to almost 1.5 million by the end of 2023. Households with an average mortgage size of $585,000 now pay another $1,415 every month than they were paying before the RBA started its current rate raising cycle.

However, despite the rates surge, defaults and arrear rates still sit below their pre-pandemic averages with most borrowers expected to manage their higher repayments when their loans move up to the higher variable rates.

With regard to these remaining mortgage holders, the Bank said: “The majority of current fixed-rate borrowers are estimated to have sufficient income to continue meeting their obligations after moving onto higher mortgage payments.”

The RBA estimates that of all the remaining owner-occupier customers of the big four banks with fixed rate loans, about two-thirds have liquid savings equivalent to at least 12 months of scheduled mortgage payments – about the same as variable-rate owner-occupier borrowers. However, it did note that less than 20 per cent of fixed-rate borrowers who will roll off onto higher interest rates have much lower savings buffers that are equivalent to less than three months of scheduled mortgage payments.

So, yes, there will be some pain felt by some as their turn comes up to negotiate a new variable rate mortgage, but the RBA and the banks are doing what they fiscally can to minimise casualties as the cliff approaches. 

“We have seen the peak of the expiring of those fixed rate mortgages,” PropTrack director of economic research Cameron Kushner told NCA NewsWire.

Kushner said despite pockets of pain alongside a broader fall in household consumption and savings, borrowers are handling the transition “reasonably well”.

“It’s usually those things that we don’t see coming that are really problematic – we’ve been talking about this fixed rate mortgage cliff for a number of years now, people have had a lot of scope and time to prepare when this did eventuate,” he says.


‘The Sydney suburbs where homeowners can’t afford their mortgages,’ Tawar Razaghi, Domain, 12 November 2023
‘Short-term rental review targets 90,000 homes,’ Alexandra Smith, Sydney Morning Herald, 12 November 2023
‘Minns’ housing plan has two problems he can’t solve, Sean Murphy, Sydney Morning Herald, 9 November 2023
‘Plan to fit 3000 homes between two metro stations in northern Sydney revealed,’ Michael McGowan, Sydney Morning Herald, 9 November 2023
‘Expect more of this’: Minns vows to override councils on housing as Ryde objects to latest plan,’ Michael McGowan, Sydney Morning Herald, 10 November 2023
‘RBA interest rates: Reserve Bank hikes cash rate by 25 basis points to 4.35%,’ Peter Hannam, The Guardian, 8 November 2023
‘Another rate rise? It’s the last thing we need,’ Noel Whittaker, The Sydney Morning Herald, 8 November 2023
‘Household borrowers weather interest rate storm but more pain on horizon,’ Jack Quail,, 29 October 2023
‘Australian house prices face “another downturn”, Leith van Onselen, Macrobusiness, 7 November 2023
‘Ajay expected house prices to fall in his Sydney suburb. They didn’t,’ Tawar Razaghi and Melissa Heagney-Bayliss, Domain, 29 October 2023
‘Whatever happened to forecasts of 20 per cent property price falls?,’ Tawar Razaghi, Domain, 20 October 2023
‘A tiny, geometric shoebox’: housing crisis prompts debate on minimum apartment sizes in Australian cities,’ James Norman, The Guardian, 28 October 2023
‘What your home will be worth in two years,’ Aidan Devine,, 15 October 2023
‘The fixed rate mortgage ‘cliff’ was a myth,’ John Kehoe, Australian Financial Review, 13 October 2023
‘The bond-free rental: how Build-to-rent is shaking up Australia’s rental market,’ Benn Dorrington,, 13 October 2023
‘Sydney poised for priority zones to solve housing crisis,’ Michael McGowan and Max Maddison,
Sydney Morning Herald, 31 October 2023
‘NSW decision to claim part of Moore Park Golf Course for public park driven by rise in apartment living,’ Sean Tarek Goodwin and Jean Kennedy, ABC News online, 23 October 2023
‘Prices for one type of property were booming. Now they’re losing steam,’ Kate Burke, Siydney Morning Herald, 3 November 2023
‘The graph that shows how buying a house just got even further out of reach,’ Tawar Razaghi, 27 October 2023