Welcome to the Q1 2023 edition of Banner Asset Management’s Quarterly Property Report. Residential property prices fell by another 0.6 per cent in the first quarter but showed early signs of stabilising in March. Rents rose steeply as population growth– including renewed immigration– exacerbated the impact of a national housing shortage.

Industrial and logistics properties continued to outshine other commercial sectors as the shift to online shopping helped keep vacancy rates at historic allows. In the office sector, demand for quality space showed no sign of abating as companies sought to attract talent and maintain sustainable operations.

Like other countries, Australia is experiencing a slowdown in economic growth that may impact business and consumer decision-making in the months ahead.

This quarter’s Spotlight section provides an in-depth analysis of the demographic changes that are reshaping the nation’s property market. A surge in new immigrants following the reopening of Australia’s borders and its existing ageing population is driving demand for different kinds of housing to those that were previously popular.

We hope you find these insights useful.

Australia’s economic growth has moderated with the latest official data showing gross domestic product (GDP)increased by 0.5% in the three months through December¹, down from 0.7% in the previous quarter.

It was the fifth consecutive increase in GDP, though the second quarter in a row in which growth has slowed. Annual growth has also declined to 2.7%² from the robust 5.9% recorded in September last year when the economy rebounded from the low base registered during COVID lockdowns.

The December quarter figure was below trend and broadly in line with population growth, which implies that GDP per capita was flat, according to the Reserve Bank of Australia.³

The biggest drivers of quarterly GDP numbers were final consumption and net trade⁴. However, consumption growth has slowed and the RBA has noted the bounce-back in spending following the pandemic has largely run its course. Higher interest rates, falling housing values and cost of living pressures are weighing on house hold budgets.⁵

Net trade contributed 1.1 percentage points to GDP, as exports increased 1.1% and imports fell 4.3%. Services exports, in particular, rose as tourists and international students returned to Australia following previous border closures.

The RBA continued to raise official rates in the March quarter, announcing two 25 basis point increases that pushed the target cash rate to 3.6% after 10 consecutive hikes.⁶

It subsequently paused rate hikes in April after recent banking system problems resulted in a reassessment of the outlook for global interest rates, though it indicated this does not mean rate increases are over.

Inflation rose by 8.4% over the year to December⁷ and the RBA’s central forecast is for it to decline this year and next, to be around 3% in mid-2025.⁸

In a statement accompanying the central bank’s monetary policy decision in March, RBA Governor Philip Lowe reiterated that it is seeking to return inflation to its 2-3% target range while keeping the economy on an even keel. He also reinforced that “the path to achieving a soft landing remains a narrow one”.

Growth over the next couple of years is expected to remain below trend and the RBA forecast is for GDP growth of around1.5% in 2023 and 2024.⁹

The March gain was driven by a tight rental market and renewed migration, with Sydney recording the biggest increase in prices over the month (1.4%).²

On an annual basis, national prices were 8% lower than the same period last year –though most housing prices remain higher than at the onset of COVID-19 in 2020.³

Listings are lower than the previous five-year average in every state capital city other than Hobart but auction clearance rates are rising back to average – if not above average in some cities.⁴

It is unclear if the gain in March will transpire into a longer-term trend of rising prices as the full impact of higher interest rates on household budgets has yet to take effect. Slowing economic growth may dent consumer confidence in the months ahead.

Fixed rate ‘cliff’

Higher interest rates are expected to take slightly longer than usual to impact all mortgage holders due to the number of borrowers who took out ultra-cheap fixed rate loans during COVID-19.

According to the RBA, the value of fixed rate loans increased substantially during the pandemic to peak at 40% of outstanding housing credit in 2022, or roughly twice their usual share.¹

The central bank estimates that 880,000of these loans will be reset this year and another 450,000 loans in 2024.² This ‘fixed rate cliff’ means borrowers will face large increases in repayments when their current loans expire, though the actual impact will vary depending on individual circumstances.

Unit rents soar highest

A shortage of rental housing combined with population growth and renewed immigration after COVID-19 continues to force rents higher in big capital cities, while rental growth in smaller capitals is slowing.

Unit rent is growing at a materially faster rate than other properties, according to CoreLogic, as more tenants seek out medium-to high-density dwellings instead of more expensive houses. A surge in international students and other migrants after Australia’s border reopening is adding to rental demand in inner city areas and university precincts.³

Both Sydney (5.3%) and Melbourne(4.3%) experienced a record quarterly rise in unit rents in the first three months of the year. The annual pace of rental growth for units in Sydney (18.1%) is now almost double the growth recorded for houses (9.4%).⁴

Tenant demand is strong, thanks to long-term structural shifts towards online retail and ecommerce. Additionally, while global supply chains are stabilising, businesses have learned their lessons on maintaining inventory levels as a safeguard against short-term volatility in supply lines.

Vacancy rates in industrial property remain at historical lows with the national average falling to 0.5% in the March quarter, from 0.6% at the end of 2022, according to Colliers.¹

As in other sectors, high-quality industrial property is most in demand. According to JLL, tenants are seeking spaces with ESG credentials that are adapted for automated processes² and this is encouraging investors with older buildings to consider redeveloping to meet the market.

Meanwhile, high construction costs and restricted material availability are curbing speculative developments. Pre-lease transactions accounted for 41% of all deals over the first quarter of 2023 and 66% of the 2023 pipeline is already pre-committed, CBRE’s data shows.³

The undersupply is pushing face rents higher and incentives lower in both prime and secondary grade markets. Colliers is now predicting 15% rent growth in 2023 after stronger-than-expected rent growth in the first quarter of the year.⁴