Residential Property Market Outlook

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June 2024

KPMG Australia

Residential

Property

Market

Outlook

Residential Property Market Outlook

Contents

Executive

summary

Market overview

Recent trends affecting property prices

Dwelling prices f

orecasts

Our findings

Contacts

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– In a year of high interest rates, elevated

inflation and subdued consumer sentiment,

national house prices increased by 7.7% and

national unit prices increased by 6.1%

between March 2023 and March 2024.

– Households have seemed to cope well so far

with the 4 percentage points increase in the

mortgage rates and the fixed-rate mortgage

cliff as the labour market remains robust and

the unemployment rate remains relatively low.

– Rental prices have been on the rise as strong

population growth and limited housing supply

are exerting more pressure on the rental

market. Rental prices rose 7.8% annually, the

strongest rise since the March 2009 quarter.

Rental price growth continues to reflect low

vacancy rates and a tight rental market.

– We expect annual rent growth will be around

4–5% over the next two years based on our

projections for new dwelling completions and

the Treasury’s population forecasts.

– We anticipate a reversal in the declining trend

of housing approvals, driven by robust

population growth and the resurgence in

house prices. However, this means only a

limited translation of increased approvals into

actual housing completions within the

forecasted period due to the time lag inherent

in the process from approval to completion.

– We expect that price growth will be slower in

2024 than in 2023 as the prolonged

contractionary interest rates will subsequently

exert a cooling effect on the market and partly

offset the gains as a result.

– Interest rates will be the main influencing

factor to house prices in 2025. We expect the

RBA to cut rates in the last quarter of 2024

which is anticipated to have a positive impact

on house prices via the availability of credit

and buyer’s confidence.

Executive summary

KPMG’s outlook for dwelling prices

remain largely unchanged on a national

level relative to our previous publication.

KPMG forecasts national house prices to

continue to rise 5.3% in 2024 and 5.6%

in 2025.

Unit prices are forecast to rise 4.5% in

2024 and 5.6% in 2025.

Residential Property Market Outlook

From March 2023 to March 2024, national house prices

increased by 7.7% and national unit prices increased by

6.1% according to Proptrack.

This growth persisted despite the backdrop of continued

interest rate hikes, inflationary pressures, and subdued

consumer sentiment.

Several factors contributed to the buoyancy of the market.

Unprecedented population growth following the pandemic,

coupled with low unemployment rates and a tight rental

market maintained the seller’s advantage throughout

2023. Additionally, a decline in construction activity

exacerbated the mismatch in supply and demand, fuelling

the upward trajectory of house prices.

Weak supply and the pullback in construction activity has

also played a role in sustaining house prices. Although

material costs and financing costs have started to

stabilise after sustained increases, labour costs continue

to increase in response to high demand for qualified

tradespeople.

The much-discussed ‘fixed-rate cliff’ did not have the

anticipated impact on the housing market. Contrary to

initial predictions, the transition of mortgage holders from

lower fixed-rate loans have not yet resulted in a significant

increase in distressed listings or delinquency rates.

Chart 1 – National residential property price index

(June 2020 = 100)

In the past 12 months, Perth houses have outperformed

the other capital cities, with values sitting at 17.6% higher

than at the end of March 2023 as seen in Chart 2.

Sydney, Brisbane and Adelaide houses also recorded

large increases, with values rising by 8.5%, 12.2% and

12.6% respectively.

Brisbane units recorded the largest rise in value across all

capital cities in the past 12 months, with values increasing

12.8% since March 2023. Adelaide units and Perth units

have also experienced large gains, with values rising by

11.1% and 12.0% respectively.

Chart 2 – Growth in house and unit prices since

March 2023

Market overview

House prices went up in 2023 despite prolonged contractionary monetary policy and the cost-

of-living crisis.

Source: ABS, Proptrack, KPMG

Residential Property Market Outlook

Source: ABS, Proptrack, KPMG

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The latest ABS building approval figures for March 2024

reveal that the number of houses approved for

construction remained at the lowest levels for more than a

decade. The data shows that new house approvals have

fallen in three of the past six months and have been on a

declining trend since mid-2022 reflecting the effects of

higher building costs, which have increased by more than

31% since the pandemic.

Recent data shows a stabilisation in construction costs.

Over the past 12 months, input prices to house

construction rose 2.4% in the December quarter 2023,

following rises of 4.4% and 7.4% in the June and

September quarter respectively. Reduced demand for

new construction resulted in suppliers discounting

products used during earlier stages of construction,

such as structural steel products, partially offsetting rises.

Increased capacity in sea freight is also contributing to

easing prices for imported materials.

Wages growth in the construction sector has also fallen in

line with national wages growth, noting that wages growth

for the construction industry has risen by 7.8%, slightly

higher than the national average wages growth of 7.6%

for the period after the pandemic.

We expect building approvals are at a turning point

because dwelling prices have recovered and the

underlying demand for housing remains high as a

consequence of the recent spike in population.

Nevertheless, it still only means a limited translation of

increased approvals into actual housing completions

within the forecasted period due to the time lag inherent

in the process from approval to completion.

Chart 3 – Building activity: number of approvals and

completions (four-quarter moving average, number

of dwellings)

Source: ABS, Haver, KPMG

Recent trends affecting property prices

Chart 4 – Growth in building costs (%, y/y)

Source: ABS, Haver, KPMG

Households look well-braced to withstand the fixed-

rate cliff

The latest Housing Industry Australia–Commonwealth

Bank Housing Affordability Index, which measures

accessibility to home ownership for an average first home

buyer, reveals that average first home buyers need to

allocate approximately 56.9% of their income towards

mortgage repayments in Q4 2023, a significant increase

from 49.3% recorded in Q4 2022.

$350 billion worth of mortgages or half of all fixed rate

credit, equivalent to around 880,000 loans, expired in

2023, with the peak of the roll-off passed in the June and

September quarters. The remaining 38% of fixed rate

credit, which includes about 450,000 loan facilities, will

expire in 2024 and beyond.

So far the ‘fixed-rate cliff’ has not yet had the anticipated

impact on the housing market, as households have coped

with the 4 percentage points increase in the mortgage

rates, helped by the fact that Australia’s labour market

remains robust and the unemployment rate remains

relatively low.

The latest data for May 2024 from SQM Research reveals

that the number of distressed listings nationally decreased

2.5% over the month and down 8.5% annually. The trend

for distressed property listings varies across states, with

some experiencing large annual decreases (QLD, WA, SA)

and others experiencing increases (NSW, VIC, ACT, TAS).

Residential Property Market Outlook

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Building approvals fell to a level well below Australia’s underlying dwelling requirement,

worsening housing affordability

Uncertainty about borrowing capacities should be

reduced as tightening cycle tops out

Buyers’ uncertainty regarding borrowing capacities and

mortgage servicing costs is alleviating as the Reserve Bank

of Australia has completed its tightening cycle and we

expect a rate cut in Q4 2024 or Q1 2025.

The overall value of new loan commitments for housing

rose to approximately $80 billion in Q1 2024 after reaching

a three-year low in Q1 2023. In y/y terms, new housing

finance commitments for housing recorded its first positive

growth for two consecutive quarters.

Chart 5 – The value of new loan commitments ($ billion)

Residential Property Market Outlook

The government is dropping immigration back to

‘normal’ levels

High immigration rates have added significant pressure

to the housing market. In FY23, net overseas migration

was 518,100, much higher than the government’s original

estimate of 400,000. The Budget projected that overseas

migration will further add a net gain of 316,000 and

261,000 to Australia’s population in FY24 and FY25

respectively.

It’s important to note that short-term visitors (which

primarily consist of visitors who come to visit friends and

relatives, and tourists) though not included in the

Estimated Resident Population, make up a considerable

portion, about half, of long-term and permanent visitors.

These visitors significantly contribute to the demand for

housing in Australia. The ABS Estimated Resident

Population excludes short-term visitors who do not meet

the Net Overseas Migration (NOM) ‘12/16 month rule’.

The 12/16 month rule works on the basis ‘that overseas

travellers (whether Australian residents or overseas

visitors) who are in Australia for a total of 12 months

(defined as 365 days) or more during the 16 month period

(defined as 486 days) following an overseas movement

will be added to NOM estimates. Similarly, travellers who

are overseas for 12 months or more out of the 16 month

follow-up period will be subtracted from NOM estimates’.

Chart 6 – Foreign immigration

Source: ABS, Haver, KPMG

Looking forward, the government is trying to balance

between a natural increase versus migration by tightening

the visa process for migration workers and international

students. The government estimates that without these

measures, migration levels would have remained higher

for longer – at 440,000 and 305,000 in FY24 and

FY25 respectively.

Source: ABS, Haver, KPMG

Foreign investment yet to rebound

Foreign investment further recovered in FY23 with 6,576

residential real estate approvals totalling $7.9 billion,

following 5,433 approvals totalling $7.6 billion in FY22.

In FY23, China remained the largest source country of

investment for approved residential real estate proposals

($3.4 billion).

Foreign demand for Australian residential real estate is

tipped to face some uncertainty this year as foreign

investment faces increased fees and stricter compliance.

Fees for investments in established dwellings will rise

significantly, but lower fees will be introduced for ‘build

to rent’ projects. This will reduce foreign demand for

established dwellings, while helping increase the housing

stock which will look to reduce the rental crisis.

Chart 7 – Foreign investment activity

Source: ABS, KPMG

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Chart 8 – Rent vacancy rate and rent inflation

Residential Property Market Outlook

Source: ABS, Haver, KPMG

Source: FIRB, KPMG

Rental costs not expected to ease

Robust population growth and limited housing supply are

poised to exert more pressure on the rental market. The

population increase per new dwelling completed currently

exceeds the levels observed during the immigration boom

of 2008.

Our analysis indicates that the population increase per

new dwelling ratio is a strong predictor of rent inflation.

That is, KPMG’s analysis shows that nominal rents tend to

rise 0.3% each quarter when population growth matches

growth in dwellings. Our analysis finds this relationship

between quarterly population growth and quarterly growth

in dwellings can account for up to 75% of variations in rent

inflation, with the remaining factors potentially explained

by changes in dwelling formation. Furthermore, during

immigration booms, nominal rents tend to rise even faster,

increasing by 0.5% each quarter when population growth

matches dwelling growth.

Based on our projections for new dwelling completions

and the Treasury’s population forecasts, we anticipate that

the Rents subgroup of the CPI will likely exceed the 10-

year pre-Covid average quarterly growth rate by an

additional 0.4 percentage point each quarter until the end

of 2025. These numbers are downgraded from our earlier

forecast last year as we anticipate a slight upward

moderation in housing completions. This also means

annual rent growth will be 4–5% over 2024 and 2025,

which is 1–2 percentage points higher than the long-term

average of 3.0%.

Furthermore, KPMG estimates new dwelling completions

need to be around 45% higher than current dwelling

completion forecasts in order for this above-trend rental

growth to be pulled back to normal levels while still

allowing for the expected population growth over the next

few years.

High rental costs may make it more appealing to own

a home

The balance between rental costs and the financial benefits

of owning a property can impact the overall housing market

dynamics. When the cost of renting is comparable to the

cost of buying and owning a similar property, households

may opt for home ownership, potentially driving up house

prices. Conversely, if renting is more affordable, it can exert

downward pressure on housing prices.

The rental market is tight, where the SQM national rental

vacancy rate index is 1.03% in Q1 2024, the lowest

historical level. In contrast, the vacancy rate averaged at

around 2.4% in the five years before the pandemic.

Rent inflation has increased by approximately 7.8% over

the year in Q1 2024, after increasing 7.3% in Q4 2023 and

remains one of the key contributors to the consumer price

index in the March quarter 2024.

The rate of quarterly and annual growth in rents this quarter

was moderated in Q1 2024 by increases in Commonwealth

Rent Assistance (CRA). Excluding these changes to CRA,

rents would have increased by 9.5% over the 12 months to

the March 2024 quarter.

Chart 9 – Population increase per new dwelling

completed and rent inflation

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Dwelling prices forecasts

Long run property prices

Real house prices in the long run are heavily conditioned

by two key factors: population (demand) and housing

stock (supply).

Population

We adopt the population projections in this year’s Budget

paper. Population growth is now expected to be 2.0% in

FY23,1.7% in FY24 and 1.5% in FY25.

Strong population growth in the near term reflects the

catch-up of net overseas arrivals after the pandemic.

However, the strength in population growth is expected to

be temporary, with migration patterns expected to return

to normal in FY25.

Housing stock

Australia’s stock of dwellings changes over time as our

population changes and demographic factors, including

family composition and age, influence the type of

dwellings in demand.

For this study, we have constructed our own quarterly

estimate of housing stock for each capital city due to the

limitations in the data provided by the Census and the

ABS. We note that the Census of Population and Housing

only provides a count of housing stock every five years. In

addition, while recently the ABS provides some quarterly

housing stock data, it only covers a limited time span from

the June quarter 2016 to the June quarter 2022 and the

ABS does not plan to update the data regularly.

We construct the housing stock by adding housing

completions and subtracting housing demolitions, which

appears to have some relationship with housing approvals

(in terms of completion rate and the time lag between the

receipt of a building approval and the actual demolition) to

the initial Census housing stock numbers. Our estimates

are reliable as they align well with the official ABS housing

stock numbers that are available from 2016 to 2022.

Residential Property Market Outlook

KPMG Economics’ dwelling price forecasts

utilise an error-correction model (ECM)

framework. This framework was chosen as our

analysis found that, over time, house prices

tend to revert back to the equilibrium suggested

by the long run relationship between population

and housing stock, but that in the short run

factors like interest rates, employment and

housing completions can influence prices

around the long run equilibrium.

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Short run property prices

Real property prices in the short run are also influenced by

a range of factors that push and pull real property prices

away from the long run levels.

KPMG’s analysis identifies a range of short run factors that

influence real dwelling prices, including:

– momentum being growth in real dwelling prices in the

previous period

– the magnitude of the gap between the actual price and

the estimated long run equilibrium price

– interest rates

– new housing completions

– interconnected markets.

We also consider several other short run factors such as

the share of dwellings purchased by investors, the strength

of the labour market as captured by the number of people

employed, and the cost of renting versus mortgage

repayment for a similar property (the renting-buying gap).

However, these factors rarely display a strong forecasting

power on prices growth.

In the context of this modelling analysis, only prices growth

momentum and the long run gap are determined within the

model. In contrast, projections for interest rates, inflation,

and new housing completions are developed independently

outside the model. In particular:

– interest rates peak at 4.35% and will start to fall

gradually from the end of Q4 2024 to 3.1% by the end of

2025

– inflation follows the forecasts prepared by KPMG

Economics as per the March 2024 edition of the KPMG

Quarterly Economic Outlook

– housing completion forecasts involve analysing the

lagged relationship between housing approvals and

completions. This is done first by considering the

influence of forecasted population and residential

prices on housing approvals.

Chart 10 – Forecasts of interest rate and inflation

Residential Property Market Outlook

Chart 11 – Forecasts of housing completions (number

of dwellings)

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The key findings of KPMG’s analysis for the national

dwelling market is summarised on this page, while the

charts presented show historic and forecast dwelling

prices by property type and market.

House prices growth is expected to decelerate in 2024

compared to the rapid expansion witnessed in 2023,

primarily due to a cooling-down market. KPMG forecast

national house and unit prices to continue to rise by 5.3%

and 4.5% in 2024. The previous year saw a surge in

demand fuelled by strong population growth and

constrained housing supply. However, as the market

adjusts and we expect more balanced population growth

in 2024, these factors will result in a more tempered

growth trajectory for dwelling prices.

Anticipated rate cuts are predicted to drive

accelerated growth in house and unit prices

in 2025

House prices and unit prices are projected to accelerate

further in FY25 as dwelling supply continues to be limited

throughout the forecasting period, coupled with the

anticipated rate cuts. Positive market dynamics,

increased investor sentiment, and potentially relaxed

lending conditions driven by anticipated rate cuts will all

contribute to heightened demand and fuel price growth.

In FY25, national house prices and unit prices are

forecast to rise by 5.6%.

Our findings

Residential Property Market Outlook

Complex market dynamics across cities and

property types

In 2024, houses prices are expected to grow moderately

in all cities except for Hobart and Darwin.

House prices growth in Perth is expected to be strongest,

with house prices rising by approximately 10.2% by the

end of 2024. Brisbane and Adelaide are also poised to

record strong price growth in 2024.

Notably, we revise our forecast for Hobart downward

compared to our previous publication due to recent weak

growth data observed in the region. This slowdown in

growth is expected to impact the momentum of economic

expansion in Hobart. Additionally, we have noted weak

growth trends in Melbourne, which serves as a significant

indicator for growth in Hobart. Given the interconnected

nature of these two markets, the sluggish performance in

Melbourne is likely to have a ripple effect on Hobart’s

economic prospects.

Table 1 – Forecasts of house prices and unit prices (% y/y)

Dec-24

Dec-25 Dec-24

Dec-25

Sydney

4.9%

5.3% 3.8%

5.6%

Melbourne

2.8% 6.5% 3.3%

6.5%

Brisbane 7.8% 5.1% 5.7%

2.5%

Adelaide 7.9% 5.9% 6.9% 4.6%

Perth 10.2% 5.2% 8.6% 8.0%

Hobart 1.4% 5.7% 2.2% 5.3%

Darwin 1.4% 5.8% 1.7% 4.0%

Canberra 4.2% 6.0% 1.3% 4.1%

Unit

House

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We expect that price growth will be slower in 2024 than in 2023

House prices forecasts (June 2020 = 100)

Residential Property Market Outlook

Source: ABS, Proptrack, KPMG

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Unit prices forecasts (June 2020 = 100)

Residential Property Market Outlook

Source: ABS, Proptrack, KPMG

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KPMG.com.au

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to unavoidable statistical variation. While all care has been taken to account for statistical variation, care should be taken whenever considering or using this information. There will

usually be differences between forecast or projected and actual results, because events and circumstances frequently do not occur as expected or predicted, and those differences

may be material. Any estimates or projections will only take into account information available to KPMG up to the date of this report and so findings may be affected by new information.

Events may have occurred since this report was prepared, which may impact on it and its findings.

The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity.

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June 2024 | 1297022416E.

Key contacts

Dr Brendan Rynne

Chief Economist & Partner

T: +61 3 9288 5780

[email protected]

Dr Brian Tran

Economist

T: +61 3 8614 5625

E: [email protected]