House prices were set to fall 20 per cent. Now there’s talk of record highs

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Key points

• Domain predicts capital city house prices will climb 2 per cent to 4 per cent in the 2024 fiscal year. 
• Economists are split on the outlook for the property market in the next 12 months. 
• Strong demand and limited supply are set to support house prices, but headwinds include rising interest rates and rising unemployment. 

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Some capital city property markets could fully recover and reach record high prices by the end of June next year because of strong population growth and a lack of homes being built, a new forecast predicts.

The combined capital cities could see house prices rise 2 per cent to 4 per cent by the end of the 2024 financial year and units could climb by 1 per cent to 3 per cent, the Domain Forecast Report predicts.

Sydney was predicted to have the strongest growth — up 6 per cent to 9 per cent for houses over the same period, and 2 per cent to 5 per cent for units. Melbourne was still suffering a “hangover” from its lockdown periods, Domain head of research and economics Dr Nicola Powell said, and would only have subdued growth between 0 per cent and 2 per cent for houses and a fall of 2 per cent up to 1 per cent growth in units.

“We expect prices to rise, and it will be led by Sydney,” she said. “We saw momentum build this year, particularly in Sydney.

“It’s a steady recovery. This isn’t a snap-back into a boom phase.”

Last year’s property price falls were the steepest on record and major economists warned the peak to trough downturn could be 15 per cent to 20 per cent, before revising their outlook upwards when it became clear there were few homes for sale and strong demand.

The latest forecast comes even as the Reserve Bank has lifted the cash rate at the fastest pace for three decades since May last year, up from a record low of 0.1 per cent to 4.1 per cent, and has signposted further tightening.

Prices rising while interest rates were being hiked by the RBA was counterintuitive, Powell said, but added other economic factors would outweigh the downwards pressure from declining borrowing capacity, potential distressed sales, rising unemployment and sluggish real wages growth.

“We’ve seen this happen before. The thing that’s underpinned growth has been the lack of supply,” she said. “The two things that will counteract that is population growth, what we will see is some coming from overseas will skip the rental phase.

“But also we have an undersupply of housing … and it’s going to get worse.”

Domain was predicting house prices would climb by up to 4 per cent in Australia’s capital cities. Credit: Justin McManus

A shift in housing preferences towards fewer people per household during the pandemic meant an extra 300,000 dwellings were needed to house everyone, she said.

Domain’s forecast is roughly in line with what some major banks are tipping, but had been calculated over the financial year rather than a calendar year, although other economists are more downbeat.

Commonwealth Bank was predicting Australian home prices to grow 3 per cent this calendar year and 5 per cent in the next.

Westpac forecasts prices would be stagnant this year and grow by 5 per cent in 2024.

ANZ was more cautious, predicting a flat year in 2023 and just 2 per cent growth in 2024. NAB was similarly bearish, predicting a fall of 3 per cent to 4 per cent this year and a stabilisation next year.

Commonwealth Bank head of Australian economics Gareth Aird said he felt Powell’s forecast was reasonable.

“There’s really strong immigration which is expected to continue. And there’s a really tight rental market and building approvals have come back quite strongly,” he said. “That dynamic will actually support home prices even though what has happened with the cash rate should cause them to fall.”

Sydney would lead the house price recovery, Domain’s forecast said. Credit: Rhett Wyman

Aird expected economic conditions to improve next year, which should buoy the property market.

“Our expectation is the RBA will be cutting the interest rate next year so that will be a tailwind on prices,” he said. “Home prices in general just trend upward over time. Inflation and income is always going up so once you go through a little cyclical downturn [prices should improve].”

The threat of a recession and any worse-than-expected effects of rate hikes could cause further falls, Aird said, but he felt market conditions were more in favour of price growth.

“That’s a risk. But even then, our forecast for the unemployment rate to go up will mean we still have a low unemployment rate in a historical sense,” he said. “You’re still going to have the bulk of people who want a job in employment, so the degree of forced sales will be really low.

“If the RBA goes too far with interest rates … They’re not going to hold them high indefinitely if they’ve gone too far.”

NAB head of market economics Tapas Strickland said most economists were overselling the effect of overseas migration.

“We’re not totally convinced of the narrative of the housing market stabilising because of high migration,” he said. “There’s been a lot said of international migration, but a large portion of those are international students.”

Strickland said the effect of rate rises was being underplayed, too.

“The affordability constraints are quite high, especially if the RBA hikes rates higher,” he said. “It’s possible [prices will rise]. But a very pronounced change has occurred in the past two months and that is the RBA lifted the rate and said they could lift it further.

“We’re obviously not at that peak yet. The narrative of: ‘If you borrow now rates will get lower.’ That narrative will be starting to disappear.”

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