The first quarter of 2023 has played out largely as expected when it comes to residential property – with one notable exception.

At the start of the year, we forecast that national property prices would fall 7% to 10%, but it appears the direction of the market would now have to change significantly in the next nine months for those figures to be realised.

Property prices rose in February and March on the back of an extremely low volume of new listings coming to the market.

An ongoing lack of overall stock, coupled with demand for properties holding up much better than expected, is seeing prices rise.

Despite the recent fall in sales volumes, they were much higher last month than they were in both March 2019 and 2020.

The relatively heightened sales activity and lack of stock hasn’t afforded buyers enough scope to secure large discounts and has led to prices rising marginally over the first three months of the year.

Will things change over the second quarter of 2023? Let’s take out the crystal ball and try to answer five key questions for the housing market.

1. How much further will interest rates increase?

Official interest rates have now increased by 350 basis points since May 2022, with the Reserve Bank deciding to pause its hikes in April.

The RBA has indicated it may need to lift rates again in the future. At the very least, mortgage holders have now had a reprieve and the hiking cycle appears to be either at its end, or close to it.

Only a few months ago, there was speculation that interest rates would rise well above 4%. The likelihood of that now occurring appears low, which will have mortgage holders rejoicing.

2. Will we continue to see a low volume of stock for sale?

One of the most surprising developments over the first quarter of this year, despite the countless predictions of mortgage stress and defaults rising, is the lack of new listings coming to market.

The spring selling season saw a low volume of new listings and the lack of supply coming to market persisted throughout the first quarter of this year, albeit we did see a bit of a rise in March.

The feedback we’ve heard is that the ongoing uncertainty over interest rates has discouraged people from listing, as well as the higher mortgage repayments as a result. Higher rates mean some need to sell before buying again, and the tight rental market is discouraging them from doing so.

With interest rates now on hold, if that continues over the next few months, it’s likely we’ll start seeing more properties coming to market.

Also, if people believe they are going to find it hard to repay their mortgages, it would be better to get properties on the market sooner while there’s less competition with other vendors and while prices have stabilised.

Waiting until there is more stock available for sale means greater competition with other vendors.

3. Will the price stability over recent months continue?

The lack of stock available for sale has been a major contributor to the unexpected strength in prices throughout the first quarter of this year.

The direction of property prices from here will likely be dependent on future interest rate movements, any changes to serviceability assessment rates from Australian Prudential Regulation Authority, and the amount of stock available for sale.

Once it has become clear that interest rates are on hold, we will likely see more stock come to the market. More stock for sale potentially affords purchasers a greater opportunity to negotiate on price and may lead to further price falls.

However, if the interest rate stability also results in an increase in buyer demand, then the current housing market conditions may hold.

4. Will advertised rents continue to rise?

Advertised rents continue to climb due to a lack of stock available for rent and very strong demand from tenants.

This is due to falling household sizes, few new investors entering the market, a high number of investors exiting the market, few first home buyers currently looking to enter the market, and a rapid increase in overseas arrivals to the country.

Unfortunately, it seems unlikely that any of these factors will shift over the coming quarter, which is bad news for renters.

It has taken many years to get to this point where demand is far outstripping supply for rentals, and it will take time to rectify the situation.

The fastest way to create a better balance between demand and supply is to increase supply via more investors or reduce demand by getting more people out of renting and into their first home.

Unfortunately, high interest rates reduce borrowing capacities, making it more expensive and difficult for investors.

It also makes it harder for first-home buyers to transition from renting, especially since prices haven’t fallen anywhere near as much as borrowing capacities.

5. Will rental stock tighten any further?

It wouldn’t be surprising if rental stock tightens even further over the coming months. We can see demand remains particularly strong and supply remains very tight.

These aren’t conditions that will change quickly and, ultimately, we need a large supply injection or a big fall in demand, neither of which appear imminent.

Given this, it’s reasonable to expect the supply of rental stock will reduce further over the coming months, making it even tougher for those renting.

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