Welcome to the December 2022 edition of Banner Asset Management’s Quarterly Property Report. Rising interest rates and higher living costs have continued to weigh on residential property values over the past three months, however rents are still rising as low supply levels drive down vacancy rates.
In commercial sectors, industrial and logistics property remains a standout performer with the national vacancy rate falling to another record low of 0.6%1, still the tightest vacancy globally.
In the office market, rents remain stable as employees’ ongoing preference to work from home and the tight labour market drive a continued focus on premium office space as companies seek to entice more people back to the workplace.
After a period of robust growth, Australia’s economy is expected to moderate as rising costs impact consumer spending and global growth slows.
Savvy investors will consider positioning their portfolios for the long term, by accessing sectors that benefit from structural tailwinds and by gaining exposure through lower risk structures such as commercial real estate debt (CRE) and low LVR debt funds.
We explore some of these strategies in this month’s Spotlight section, which looks at key investment themes for 2023.
We hope you find these insights useful.
Australia’s economy continues to grow, buoyed by household spending on domestic and international travel as COVID-19 restrictions continue to ease. The latest official data shows gross domestic product increased by 0.6% in the three months through September – marking the fourth quarter of economic growth following a contraction in the September quarter of 2021, which was impacted by the COVID-19 Delta outbreak.1
The growth in the September quarter was slightly lower than the 0.9% recorded in the prior three months as weaker commodity prices drove falls in mining profits and terms of trade.1
Annual growth was up a robust 5.9% in a rebound from a low base a year earlier when large parts of the economy were in COVID-related lockdowns.1
Household spending buoyed by jobs
Household spending continued to drive growth, especially on eating out and new vehicles, as wages grew at the fastest pace since December 2006, supported by tight labour market conditions.1
The Reserve Bank of Australia (RBA) continued to raise official rates into the end of 2022 in a bid to stem inflation. The central bank increased its target cash rate by 25 basis points to 3.10% in December, marking the eighth increase in 2022.2
Inflation rose by 6.9% over the year to October, driven by global factors as well as strong domestic demand. The RBA forecast inflation to peak around 8% over the year to the December quarter 2022. Inflation is then expected to decline in 2023 due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices, and slower growth in demand.3
In a statement accompanying the central bank’s monetary policy decision in December, RBA Governor Philip Lowe said the central bank expects to increase official interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.3
Economic growth expected to moderate
Lowe said while the economy continues to grow solidly, it is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions. The RBA’s central forecast is for economic growth of around 1.5% in 2023 and 2024.3
Consumer spending has been supported by past gains in incomes, asset prices and accumulated savings during the pandemic. However, these sources of support are being eroded to some extent by high inflation, rising interest rates and falling housing prices, and this is expected to contribute to a slowing in consumption growth from early 2023.4
Elevated risks to forecasts
The RBA has warned there are many uncertainties surrounding its forecasts that make the path to achieving the central bank’s objective of returning inflation to its target band while keeping the domestic economy on an even keel.4
RBA Deputy Governor Michele Bullock in a speech said the uncertainties around the RBA’s central forecast are particularly elevated at the moment, and include the international environment, wage and price setting behaviour, household consumption, and energy and supply shocks.4
Residential property prices continued to fall in the final quarter of 2022, declining by 3.3% as the cumulative impact of eight successive interest rate hikes forced monthly mortgage repayments significantly higher at the same time as rising inflation crimped household budgets.
The continued falls meant national dwelling values had slipped around 8% from their first-half peak, according to CoreLogic’s Home Value Index, though most were still higher than levels recorded prior to the COVID-19 pandemic.
On an annual basis, dwelling values fell 5.3% – the first calendar year decline since 2018 and largest calendar year decline since 2008.1
Apartments fared best in the December quarter, declining by 2.2% versus a 3.6% fall in house prices, according to CoreLogic.1
A 2% rise in national rent values over the quarter pushed the annual increase to 10.2%7 – a jump fuelled by factors such as renewed immigration after Australia’s border reopened and low vacancy rates that spurred competition among tenants.
Rents across the country continued to move in the opposite direction to property prices in the last three months of 2022, albeit at a slower pace than previously.
In New South Wales – where unit rents in Sydney rose 15.5% over the quarter1 – the state government banned so-called rent bidding from 17 December 20222 to improve housing affordability. Rent bidding is a practice in which landlords or real estate agents ask potential tenants to increase their offer of rent in order to secure a property.
Similar bans to the NSW policy already existed in Victoria3, Queensland4 and Tasmania5.
The Federal Government also formed an Interim National Housing Supply and Affordability Council to independently advise it on housing policy. The council commenced operation on January 1 this year.6
Home sales have dipped in a reflection of market conditions. CoreLogic estimated that capital city dwelling sales in the December quarter were 30.1% lower than the previous corresponding period and 9.2% below the previous 5-year average.1
On an annual basis, Sydney and Hobart were the only capital cities where sales estimates were below the previous five-year average.
Properties are still taking longer to sell than previously and property owners are adjusting price expectations as a result. The median time on the market was 31 days by year-end, up from around 20 days a year earlier. The flow of new listings in December was almost 10% lower than the five-year average.
As a result of market conditions, vendor discounting increased to 4.2% by the end of 2022 versus 3.1% at the end of the previous year.
Approvals to construct new dwellings have also been falling, which should help to limit further falls in dwelling values this year. Dwelling approvals fell by 9% in November and were down 15% over the year. Apartments in particular have experienced a strong adjustment. Private sector dwellings excluding housing (including semi-detached housing, row houses, terraces and apartments) fell by 22.7% in the month, and are down 21% over the year.
Source: Corelogic, SQM Research residential vacancy rates