5 market factors impacting property investors right now

2023 has been a fascinating and unexpected year for Australian property, and there's a lot that investors should be keeping an eye on. 

Prices are rising in spite of still-rising interest rates, the rental market remains exceedingly tight, and buyers are kicking into gear while sellers are stalling. 

Here's a look at some of the key drivers of the property market right now and how they relate to investors.

The interest rate peak is still uncertain

Over the past year, we've seen the cash rate lift from a record-low 0.10 per cent to 4.10 per cent — the fastest hiking cycle in 40 years — and the peak remains a question mark. 

The big four banks are forecasting between one and two further rate hikes ahead before cuts arrive in 2024, so there may still be some further pain to come for borrowers. 

With such a shock rise in mortgage repayments, REIA deputy president Leanne Pilkington told the ABC that investors have been among the first to sell up to avoid financial struggle. 

"Most landlords have got two mortgages — the house they live in, and the house that they've invested in — and we are finding a higher proportion of landlords currently selling because they just can't manage two lots of repayments," she said.

She added that the majority of those investors who have chosen to sell have done so more as a precaution against financial distress rather than as a last resort. 

Whether or not interest rates do rise from here, it's already been a turbulent year for investors, particularly those who are highly leveraged.

The return of property price growth

The better news for property investors seeking capital gains has been the recent rallying of property prices across the country. 

According to CoreLogic, May was the strongest month of price growth since November 2021, adding +1.2 per cent to the median Australian property value. 

Sydney has led the pack since the beginning of the year, though every capital city and nearly every state regional market returned to positive growth for the month, signifying a strong new trend. 

Whether that trend can continue is dependent on a number of factors — inflation, interest rates and the potential for more widespread mortgage stress being primary ones. 

The big four banks are on average forecasting prices to end the year flat, suggesting that another dip could be on the way in the second half of 2023.

The ongoing rental crisis

Landlords will be all too aware of the exceedingly tight rental market dynamics which have shown little sign of easing. 

Vacancy rates remain around just 1 per cent, asking rents have grown at a double-digit annual pace, and demand continues to grow as immigration pushes record levels. 

While CoreLogic's gross rental yields measure has generally flattened due to recent property price growth, the wider rental situation could present strong cashflow opportunities for landlords with existing properties. 

Tim Lawless, CoreLogic's Research Director, noted that "additional demand for higher density styles of rental accommodation linked to the return of foreign students and overseas migrants, with regions popular with recent migrant arrivals tending to be higher density.

"Rental demand in inner-city precincts may be seeing an increase in popularity as workers return to the office and CBDs become more vibrant."

He added that supply hasn't responded to demand, with capital city rental listings sitting more than -35 per cent below the five-year average, though there are early lending signs of investor activity beginning to increase again.

An ongoing shortage of listings

Much like rental listings, sale listings have been in extremely short supply. In May, new listings were down -26 per cent year-on-year, while total listings were -24.4 per cent below the five-year average. 

This shortage has persisted since September 2022 when the typical spring rush never quite happened. 

"The last time capital city stock levels were this low, at this time of the year, was in 2007. This was also a period of rapid overseas migration and rising housing values," Mr Lawless noted. 

The shortage has been the key driver of price growth in the face of rising interest rates. The question is, when will listings begin to rise again? 

Eleanor Creagh, Senior Economist at PropTrack, expects we may see more sellers come back to the market this spring selling season, driving listings back up. 

Even so, she said, "While the pace of price rises is likely to slow as the listings environment changes… some of the factors precipitating stronger housing demand will remain."

Increased buyer demand

Overall home sale volumes have remained well below average levels in 2023, but given the supply-side shortage there has been a net increase in buyer demand. 

"At the national level, we have seen an average of 35,143 new listings added to the market over the past three months. Over the same time, we have seen an average of 39,760 dwelling sales," Mr Lawless said. 

"With such a short supply of available housing stock, buyers are becoming more competitive and there’s an element of FOMO creeping into the market."

High immigration is playing a role in the swelling of demand. So too is the rental crisis. 

With rental affordability so poor and competition between tenants so fierce, SQM Research Managing Director Louis Christopher believes that there is some overflow into the purchasing market. 

"An increasing number of tenants have been turning themselves into First Home Buyers, adding upward pressure on property prices," he said. 

Demand could be dampened by further interest rate hikes, and an influx of listings this spring could also balance the market out. They're both situations investors should be keeping a keen eye on. 

1. RateCity, 'How high will rates go? Here's what experts think about the RBA cash rate', 13 June 2023
https://www.ratecity.com.au/home-loans/mortgage-news/high-will-rates-go-here-experts-think-rba-cash-rate

2. ABC News, 'Australians selling investment properties and refinancing mortgages ‘at a rate never before seen'', 16 May 2023
https://www.abc.net.au/news/2023-05-16/banks-working-with-customers-struggling-to-repay-mortgage/102347672

3. CoreLogic News, 'CoreLogic Home Value Index surges with strongest monthly growth since November 2021', 1 June 2023
https://www.corelogic.com.au/news-research/news/2023/corelogic-home-value-index-surges-with-strongest-monthly-growth-since-november-2021

4. PropTrack newsletter, 'National home prices increase for the fifth consecutive month', 2 June 2023

5. SQM Research Weekly Newsletter, 'Rental Vacancy Rates Rise to 1.2%', 16 May 2023
https://mailchi.mp/sqmresearch/rental-vacancy-rates-rise-to-12