Is it time to breathe or brace?

This is the second last trading week before Christmas and, as we wind down for a well-deserved break after an event-filled year for real estate, how is the market trending?

As widely expected, the RBA held the cash rate steady at 4.35% for its final meeting of the year last week. Data in the months to November showed that retail trade fell and unemployment ticked up slightly and despite inflationary pressures and the declining monthly CPI measure, the bank’s overall position was to see the year out by maintaining stability.

Offsetting the weaker data flows was a surprisingly strong month of housing lending in October, up 5.4% month-on-month. The uplift in lending may be short lived however, with CoreLogic currently estimating a month-on-month decline in sales volumes over November.

Whilst the property market has remained relatively resilient in the face of increasingly challenging lending conditions, there are signs that the interest rate rises are starting to have some impact. CoreLogic’s national Home Value Index recorded its lowest monthly increase since February, with values up just 0.6% in November.

However, a slowdown in housing market performance is not necessarily a fall in values; it is an indicator that growth is slowing down. Sydney saw a marked slowdown in the rate of growth from 0.7% in October to 0.3% in November. This is in contrast to Melbourne where values actually fell -0.1% in November.

Rates are not the only factor slowing housing market performance, with stretched affordability and more normalised stock levels also having an impact. Data from APRA for the September quarter property exposures showed a continued resilience in households’ ability to service higher mortgage costs which may seem surprising given the sharp rise in mortgage rates since April 2022.

Using the average owner-occupier mortgage rate reported by the RBA for September, and assuming the November rate rise is passed on in full, the average variable rate may now be around 6.25%. For a borrower with a $750,000 loan in April 2022, this has added an estimated $1,690 per month to variable rate mortgage repayments.

However, economic data suggests households are continuing to cope through reduced savings, potentially working more hours, selling personal belongings, and putting less towards mortgage savings buffers and more towards scheduled repayments. Defaulting on their home loan and risking the roof over their head is the last stop for the overwhelming majority and the data supports the measures mortgage holders are going to to avoid this scenario.

So how is it looking for 2024?

The RBA Board will next meet in February 2024, moving to its new meeting schedule of eight meetings a year. Whether there is further movement in interest rates at that time will be highly data dependent.

Population growth and housing supply shortage have contributed to the continuing, albeit abating, price growth throughout the year. The government has announced a review of migration numbers and state and federal governments are scrambling to put together policies to enable and speed up supply. Even investors are starting to consider selling due to the economically unsound interest rate rises. However, so far, this has had minimal impact on listing volumes and therefore dwelling values.

The forecast is that housing supply is expected to remain limited in 2024 and this, combined with interest rates that are at or close to peak, is likely to lead to further price growth.