Leanne Pilkington: Interest rates, supply challenges and emerging real estate trends in 2024

In the throes of 2024, the Australian real estate market faces a critical juncture, challenged by the ebb and flow of interest rates and pressing supply issues. Here, Laing+Simmons Chief Executive Officer and Real Estate Institute of Australia President, Leanne Pilkington, reveals why this pivotal moment will demand unprecedented adaptability and strategic foresight from buyers, sellers, investors and agents alike.

Interest rates will continue to be the dominant factor influencing the real estate market in 2024.

Interestingly, on the basis of the most recent data, some are pricing in two rate cuts in the second half of 2024, although there are concerns around unemployment and the inflationary impact of the coming tax cuts.

In 2023, the impact of increased interest rates in terms of both house prices and rents was clear, and these impacts were exacerbated by the environment of low supply.

A major boost in supply has the potential to improve affordability but the delivery of more homes is not a short-term proposition, so the market is likely to remain highly sensitive to interest rate movements going forward.

While individual circumstances will always differ, lenders have generally shown a degree of leniency to mortgage holders whose repayment circumstances have changed.

Should this position change, and this leniency come to an end, there is the prospect of an increase in distressed sales.

This could be compounded by more people coming to the end of their fixed rate mortgage periods, and many will find their choices are limited to attempting to refinance or to sell.

One of the main trends we’re seeing on a statewide scale is the major exodus of investors from the market.

The substantial increase in holding costs has forced many mum and dad investors to sell and overwhelmingly, those properties are being purchased by owner-occupiers.

Every time this happens, another property is removed from long-term rental supply.

The dangerously low rental vacancy rates across metropolitan and regional markets are the unavoidable outcome of this trend.

It intensifies the pressure on governments to expedite the delivery of more homes.

Sydney’s Eastern Suburbs

The eastern suburbs market marches to the beat of its own drum.

We’re seeing a two-speed market in some areas with the defining line being whether a buyer needs finance or not.

Around the circa $5 million price point, in instances where families are seeking to upgrade, the rising interest rate environment has affected borrowing limits and prices have tapered off, but only very slightly.

At the higher end, for homes valued at $10 million-plus, prices are steady and transactions are occurring at a relatively strong rate.

If rates have now reached or nearly reached their peak, prices can be expected to remain steady.

People have re-budgeted and steady rates mean they know where they stand.

The next noteworthy movement in prices of eastern suburbs real estate is likely to be upward, if and when interest rates begin trending back down again.

Our agents are reporting increased buyer interest in properties within close proximity to train stations on the back of various housing supply announcements which carry a potential increase in floor-space ratio allowance.

A potential increase in unit block sales in 2024 will likely raise the interest of vendors, including those of well-located small commercial properties.

Sydney’s Western Suburbs

There was some pain towards the end of 2023 with the rise in the cost of living having an impact and a raft of mortgagee sales occurring in some areas of the west, particularly in higher density areas.

An increase in landlords seeking valuations of their properties is often a precursor to an increase in investor sales, though this is not a new trend.

Renters know only too well the shortage of available rental accommodation on offer.

There’s also been an increase in the number of vendors selling properties purchased in self-managed super funds, as owners can’t simply put their hands in their pockets to cover the cost of increased repayments.

Often the requirements of the super fund mean that these properties need to be positively geared.

However, despite rents increasing, in many cases these increases are not keeping up with increases in mortgage repayments.

An increase in listings in select western suburbs markets in 2024 may result in a change to the supply and demand dynamic, and as the year progresses we could potentially see conditions swing towards becoming more of a buyers’ market.

Government announcements of rezonings for higher densities may appeal to owners of property near transport nodes however there remains a disconnect with developers and the feasibility of new projects.

A meaningful increase in supply is a long-term prospect at best.

In the outer west, such as suburbs like Riverstone and Quakers Hill, these announcements contrast previous changes related to flood plains and allowable development.

Many previously planned projects in these parts will simply no longer be built, keeping a lid on supply.

In the short term, we see 2024 kicking off with a continuation of an active transaction market in the more affordable western suburbs, as the large buyer pool has not tapered off.

In recent times, we’ve seen buyers extend but not break their budget to make a purchase, and this includes buyers priced out of other, more expensive areas.

Overall, supply remains low and the cost of borrowing is expected to remain steady, so prices are more likely to plateau, even with an increase in listings.

Sydney’s Northern Suburbs

Few markets experienced a pandemic fluctuation to the extent of the northern beaches.

From the peak of the Covid boom, values in markets like Narrabeen and Collaroy declined significantly only to begin to recover in the second half of 2023 at a comparatively sharper rate than the rest of Sydney.

The investor exodus is very apparent in the northern beaches. Increased holding costs are forcing many investors to sell and the people buying these properties are predominantly owner-occupiers, including first home buyers.

Such is the strong demand for homes from owner-occupiers, in some circumstances agents are advising vendors to forget the styling and simply get the open home scheduled.

It’s not unusual to see the number of bidders registering at auctions reach into the 30s and even 40s.

As such, unlike most other markets, we’re seeing some property flipping take place, and while the full recovery from the high of the pandemic is yet to be realised, the start of 2024 is set to be characterised by continued price growth.

Sydney’s Southern Suburbs

Like the broader Sydney market, we expect the market in the city’s southern suburbs to begin the new year as 2023 ended.

The surge in listings which typically corresponds with the start of spring was delayed in some markets, as more campaigns kicked off during November and December.

The start of 2024 is set to be busy.

Prices showed a mild decline during the height of the month-on-month interest rate increases only to level out by year’s end.

Overall, stock levels are tight and while the buyer pool is large, people are cautiously sticking to their budgets.

Well-presented, turn-key properties are most attractive as high building costs make renovations a challenge.

The market is therefore price sensitive and vendors typically require motivation to sell.

We’re not seeing opportunistic capital growth-driven sales at the moment.

The future of the market is somewhat unchartered territory.

The Covid boom, the mild correction and then the subsequent recovery appears to have come full circle and steady, sustainable growth is perhaps the most likely scenario.

We therefore have an optimistic view for new campaigns slated for launch in the first quarter of 2024.

Prices are robust and stock levels remain tight.

The main trigger for change appears to be interest rates and their potential decline at some stage in 2024.

The regions

In most key regional markets, prices have largely recovered and a steady start to the year is anticipated.

The top end is generally performing well and people with established work-from-home schedules living further afield are investigating sea-change and tree-change opportunities, adding to already strong local enquiry levels.

The buyer exodus from Sydney, Canberra and even Melbourne remains evident, if not as pronounced as during the pandemic years.

The burden of stamp duty is still having a major impact on affordability and buyer behaviour.

The $800,000 exemption threshold is discouraging some first home buyers from competing for properties beyond this limit, despite what their budget would otherwise allow, and as such vendors of properties in the $800,000 to $900,000 bracket need to work closely with agents to come up with the most appropriate asking price.

The pain of interest rate rises has been acutely felt by mum-and-dad investors in particular, and investor sales characterise many regional markets at present, contributing to the extremely tight rental vacancy rates.

As investors exit the market, owner-occupiers are picking up the slack.

Given the high cost of building, the market for established housing remains strong.

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