What you need to know about the spring property market

Spring is the season of new beginnings, reinvigoration and growth - and the property market is following suit, starting the annual home-selling season in strong shape.

Interestingly, it's not interest rates that are the biggest factor when it comes to house prices. In fact, house prices rose nationally in 2023 and 2024 despite high rates.

It's the shortage that rules.

Australia is facing a shortage of everything that matters in real estate: listings of properties for sale; available rental homes; and the construction of  new dwellings.

It seems that everyone in the building industry is in agreement: the Federal government's target of 1.2 million new homes in five years won't go close to being realised.

"Overall, the national rental market remains in severe shortage and, barring some exceptions, is not expected to materially soften out of the rental crisis for some years," says Louis Christopher, founder of property researcher SQM.

The reason for the shortage boils down to record population growth (with 84% of the 2023 increase coming from overseas migrants), and a boost in confidence and borrowing capacity due to the new tax cuts.

The important thing to note is that the ongoing imbalance between supply and demand means there is the capacity for further growth in both prices and rents.

Why will house prices stay high?

The cost of building the average brick-and-tile house has risen 53% in the past three years and is now close to $500,000, excluding the land.

The mid-year tax cuts have improved borrowing capacity for would-be buyers.

When interest rates eventually come down (in late 2024 or early 2025, perhaps), it will have a similar additional impact.

Those factors, coupled with the shortages and high population growth, will keep upward pressure on prices and rents.

Why is it important to remember that there isn't one property market?

It's important to understand that there isn't one 'Australian property market'. There are many different local markets, as the results of the past 12 months for the eight capital cities demonstrate.

Perth has experienced a house price boom, up more than 20%; Brisbane and Adelaide have also recorded double-digit annual growth; Sydney has had moderate price increases; Melbourne's market has been largely stagnant; and the smallest cities, Canberra, Darwin and Hobart, have recorded no growth or a small price decline.

These myriad scenarios have been playing out across regional Australia as well.

Real estate is local in nature and arises largely out of local economic events. It's further evidence that interest rate trends, which apply equally across the nation, are not the prime factor driving prices.

Which areas are too hot to handle?

The herd mentality that drives many property investors has created a frenzy in Perth and some of the key regional centres in Western Australia, such as Bunbury and Mandurah.

Perth has had three years of strong price uplift, particularly in the 2024 financial year, when it led Australia's capital cities by a wide margin.

Many investors apparently believe the Perth boom will keep on rolling and are grabbing anything for sale regardless of quality or location, paying more than the asking price and buying without due diligence.

This report from one agent is typical: "I have just sold a home within a week of listing it. There were 20 offers, all above the asking price, and they were all unconditional" - that is, not subject to finance or building and pest inspections.

Some locations in regional Queensland have become similarly frenzied including Rockhampton and Townsville.

Australia is a big country and there are many locations with excellent prospects for long-term growth. It's not essential to own a piece of Perth, for example. And it's never a good idea to invest in a property without putting in the work - better not to buy than to buy without doing due diligence.

Are you units taking on houses?

One of the key trends to emerge in the past year - and tipped to grow in significance - is the rise of apartments to challenge houses for capital growth.

Several different cohorts are creating rising demand for attached dwellings including downsizers, lifestyle seekers (people who like the low-maintenance, lock-up-an-leave nature of units), young buyers seeking better affordability, migrants used to unit living and people who want the safety and security offered by a modern apartment building.

The old paradigm that houses on land provide superior capital growth is being challenged.

One example is Surfers Paradise: the median price for units is less than half that of houses; but the capital growth for units has been higher in the past year; the long-term growth average is also higher; yields are much higher for units than houses; and units are currently selling much faster. This trend is likely to become more prominent.

Will rents keep rising?

Christopher predicts that the rental shortage will continue for the foreseeable future, with ongoing upward pressure on rents.

But can rents keep rising at 10% to 20% a year?

Clearly, they cannot. Tenants, who tend to be those with lower incomes, cannot keep paying higher and higher rents in times when they're also paying more for electricity, petrol, groceries and lots more.

"Much of the structural rental shortage has now been priced into the rental market and so I do believe the days of 10%-20%-plus annual rental increases have come to an end," says Christopher.

There's a ceiling with rents, far more so than with sale prices. But we can be confident that rents won't be falling any time soon.

Which markets are getting a 'second wind'?

Many locations had big price growth from 2020 to 2022, then flatlined or declined for 18 months and are now showing signs of resurgence. These are called second-wind markets.

Until two or three years ago, Hobart and regional Tasmania were at the forefront of national price rises. Then those markets peaked and prices weakened, but they are now showing early signs of revival.

Other second-wind markets include:

• Queensland: The Sunshine Coast, Bundaberg, Hervey Bay, Mackay, Gladstone, Gympie.
• NSW: Byron Bay, Orange, Wagga Wagga, Dubbo.
• Victoria: Melbourne generally, Ballarat, Bendigo, Shepparton.
• Tasmania: Hobart, Launceston, Burnie, Devonport.

Darwin and Canberra are also showing signs of movement after a quiet period.

Of these, Melbourne is the major market overdue for a period of significant growth. The hangover from being 'the world's most locked-down city' is deemed largely responsible for stagnant prices.

But it is once again a national leader on population growth dominated by overseas migrants and has a strong underlying economy. Many analysts predict a real estate revival for this city and spring may be the catalyst.

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