The Australian property market has shown remarkable resilience so far in 2024, with auction clearance rates rebounding strongly in January and February after a weak end to 2023. This revival in buyer activity has coincided with growing optimism that interest rate rises may occur slower than previously anticipated. But with the outlook for rates still uncertain, it raises questions around the potential impact on property market sentiment as expectations shift.
Renewed Confidence but Uncertainty Remains
After clearance rates languished below 50% in late 2023 across major auction markets like Sydney and Melbourne, the first few weeks of 2024 saw a sharp turnaround.
Clearance rates surged back above 80% in Sydney and into the high 70% range in Melbourne during January and early February. The number of auctions held also increased significantly compared to a year ago.
CoreLogic head of research Tim Lawless attributes this renewed strength partly to lower-than-expected inflation readings, which have triggered expectations that interest rate hikes may now occur slower than first thought. Forecasts are now emerging that rates could even begin falling sooner than anticipated – and this appears to be restoring some buyer confidence.
However, CoreLogic notes this is still an uncertain environment. While lower inflation is providing some optimism, it is still expected that interest rates could still rise through 2024 before plateauing and eventually falling. So there is potential for further volatility in rate expectations to emerge – which could easily impact property market confidence and activity once again.
The Historical Link Between Rates and Prices
Clearance rates have proven to be one of the best leading indicators for pricing trends in the housing market. When clearance rates are high, it generally signals that buyer and seller expectations are aligned, and more properties are trading at acceptable price points.
Conversely, low clearance rates usually indicate sellers are aiming too high compared to what buyers are prepared to pay. This price disconnect tends to result in weaker sales activity and price growth.
The correlation between clearance rates and value growth is clear. As Tim Lawless notes, periods of high clearance rates have closely aligned with rising housing values over time. So the fact that clearance results have jumped sharply in early 2024 suggests some acceleration in price growth may emerge after declines late last year – especially in Sydney, Melbourne, and Canberra.
Most forecasts tipped a modest rise in national dwelling values of 5-6% through 2024. But early strength in auctions and confidence boosts from rate cut hopes are causing some upward revisions on those predictions.
Widening Gap Between House and Unit Prices
While the outlook for broad property price growth may be improving, one notable trend is the accelerating gap between detached house and apartment values.
According to CoreLogic research, house prices across the combined capitals have increased 34% since March 2020 compared to only 11% growth for units. This disparity has blown out dramatically, with the difference between house and unit price medians rising from 17% pre-pandemic to 45% in early 2024.
In Sydney, the gap is even more stark at close to 70% – meaning a typical house is around $570,000 more expensive than a typical unit. This shows Australians’ ongoing willingness to pay a significant premium for land and space over higher-density living.
However, units do look relatively undervalued based on higher rental yields and the worsening affordability constraints for houses. So there is potential for the unit market to see renewed demand and experience stronger price growth to close this gap as first home buyers in particular gravitate to more affordable options.
Demographic Influences on the Property Market
Population growth is one factor that should be supporting unit demand. As Tim Lawless notes, strong migration intake traditionally flows through to rental demand first before translating to buying activity further down the track. With overseas migration rising again post-pandemic, apartments and units would be the logical landing point for most new arrivals.
However, it seems this demographic shift still hasn’t overridden Australians’ cultural fixation on the great Australian dream of a detached house on a quarter-acre block. This domestic preference for space and land has likely contributed to the disproportionate growth in house prices over units and apartments amid the recent boom.
But affordability pressures will reach breaking point for many prospective homeowners. Price disparities between houses and units sitting at record highs will drive more buyers towards higher-density living even if not by choice. So unit demand appears set to rise on these necessity grounds as the housing dream drifts further out of reach.
Navigating the Property Market in 2024
The Australian property market has shown renewed signs of life after a weak finish to 2023. Clearance rates rebounding strongly and optimism around earlier rate cuts have restored some buyer confidence. But interest rate uncertainty still looms in 2024 and expectations will likely remain volatile.
This could easily impact housing sentiment and values once again. Though prices are tipped to rise moderately this year, units still appear undervalued relative to detached houses. Their affordability advantage as the market becomes increasingly out of reach for many buyers should translate into catch-up growth for apartments and higher-density living over the long term.
For advice on navigating the property market as an investor or home buyer, our team at KeyPoint Accountants is ready to assist. One of our specialties is being accountants for construction companies, and the real estate industry. We’d love for you to contact us at 07-5585-0600 or info@keypointaccountants.com.au. We can offer guidance on optimising your portfolio or purchase strategy based on the current market conditions and outlook.
