The quiet period typically observed in the property market during the summer holidays has officially ended, with things ramping up rapidly after an already unusually active January.

Buyers have been seizing the initiative earlier than ever in the new year, keen to get ahead of the market. With record levels of population growth, a lack of rental security, and fears of the market becoming quickly completely out of reach, the competitive environment in conjunction with sentiment surrounding interest rates being at their peak appears to be driving demand and prices higher still, despite some stability in construction costs.

While there is depth in buyer demand, the shortage of stock in the market that characterised the property market of 2023 has carried over into the new year in many segments of the market. With Australians staying in their homes longer, often opting to renovate instead of move, the reduction in turnover is also keeping a tight lid on supply.

Where are Australian property prices right now in 2024?

In the three months to January 2024, national home values rose 1% according to CoreLogic's Monthly Housing Chart Pack for February 2024, the smallest quarterly increase since the March quarter of 2023. Despite the easing in quarterly growth, national home values are now 8.7% higher than a year ago.

Regional home values are now rising at a faster pace compared to the capital cities, increasing at 1.2% over the same period in the three months to January compared to the 1% rise in values across the capital cities.

Economic indicators and the mystery of the property market

Economic indicators often predict the direction of the housing market. However, during and after the pandemic, these predictions became less reliable as the housing market in 2023 unexpectedly thrived despite high interest rates and widespread pessimism about the economy.

What caused these usual patterns to change, and can they return to normal?

Rising interest rates vs. Australian home prices

Typically, there's a direct contrast between interest rates and home prices. When interest rates go up, borrowing becomes more expensive, reducing people's ability to buy property, which can leads to a decrease in home prices. Conversely, when interest rates drop, home prices often increase because borrowing is cheaper.

Despite an initial dip in home prices following rate increases from April 2022 to January 2023, by November last year, prices unexpectedly reached new highs, even as interest rates continued to climb.

Why did home prices keep rising despite the increased borrowing costs?

Several factors contributed to the increase in home prices, most notably a significant rebound in population growth starting mid-2022, as international travel restrictions lifted and net overseas migration jumped to 518,000 for the 2022-23 financial year. A tight rental market, with high rent increases and low vacancy rates, also encouraged more people to look to buying a home to live in.

While a deviation from the expected trajectory of home values, this phenomenon isn't entirely new. Between 2004 and 2008, home prices also rose despite higher interest rates, supported by a strong economy, a mining boom, and increased migration, which also led to a low unemployment rate and heightened demand for homes.

In 2023, property financing data points suggests that the market saw an influx of buyers who weren't as dependent on large mortgages. Quarterly APRA data shows new housing loans secured with a 20% deposit or less shrunk from 42% in the December quarter of 2020, to 28.7% in the September quarter of 2023. This shift indicates a market with buyers having more upfront money to spend, possibly affecting the usual impact of interest rates on home prices.

National data indicates that the rapid increase in home prices started to slow down by mid-2023, suggesting that prolonged high interest rates might be starting to have the expected cooling effect on the market.

Australian's are feeling gloomy about the economy, but housing shows resilience

The Consumer Sentiment Index, created by Westpac and the Melbourne Institute, measures how optimistic households are feeling about their finances and the overall economy, as well as their willingness to make large purchases. A low score on this index means people are generally feeling negative about the economy, and in 2023, this sentiment hit its lowest average since the recession in the early 90s.

Recently, there's been a minor improvement in optimism, likely because interest rates have for the most part stabilised (the RBA has decided to hold rates in February 2024), but the mood remains largely negative.

Interestingly, while consumer sentiment has typically moved in sync with the number of homes sold, there was a notable divergence in 2023.

Despite the prevailing gloom about the economy, the average number of homes sold each month increased significantly in the latter half of the year, reaching a peak in October 2023 with over 51,000 property sales—a 27.6% jump from the year before, even as consumer confidence dipped slightly.

This unusual trend, where home sales and values rise despite widespread economic pessimism and high interest rates, might be influenced by the same factors such as the tight rental market, strong population growth, and a segment of buyers less dependent on borrowing. However, by the end of 2023, there was a slight decrease in the momentum of home sales, suggesting that the real estate market's resilience to economic pressures might have its limits.

As we entered 2024, early signs indicated a warming up of the market in some areas that had previously shown weakness. For instance, Sydney saw its highest auction clearance rate since mid-2023 at the beginning of February, and home values in Sydney experienced a slight increase after dropping at the end of the previous year. This suggests that the market might be reacting positively to the anticipation of a peak in interest rates, hinting at a potential upswing in market activity through the year.

What are buyers looking for?

In recent years, we've seen a significant evolution in buyer preferences, with a growing emphasis on practicality and inter-generational living. The pandemic has reshaped priorities, emphasising the value of space and the benefits of living close to amenities.

This shift is evident in the rising demand for properties that offer a balance between comfort and convenience, such as spacious apartments and townhouses with access to schools, shops, and transport.

Investor behaviour is also adapting to these changing dynamics. With rental yields varying across cities and an increased focus on long-term gains, investors are becoming more strategic in their choices, often selling properties in lower-yield areas to invest in cities with higher rental returns.

2024 Outlook: High demand meets tight supply

As we move further into 2024, the property market is experiencing a surge in buyer interest. The competitive environment is pushing prices up, despite a persistent shortage of quality listings. This scarcity of desirable properties, especially in the family and downsizer segments, is keeping the market tight and fuelling further competition.

Advice for homeowners, investors and sellers

In this dynamic landscape, homeowners, investors, and sellers must navigate the market with insight and strategy. Those thinking of selling this year have a unique opportunity to capitalise on the strong buyer demand, particularly for quality, family-friendly properties.

As the market continues to evolve, staying informed and adaptable will be key to success in Australia's complex property landscape. Whether you're buying, selling, or investing, the current market conditions offer a wealth of opportunities for those ready to navigate its challenges and capitalise on its potential.

Expert advice for your real estate decisions

At Little Real Estate, our professionals possess extensive knowledge of both local and national markets. Whether you're looking to optimise your investment portfolio or achieve the best possible price for your property, our team can provide valuable strategies tailored to your needs.

Contact us today and see how our extensive real estate knowledge can benefit you.