During API’s recent Victoria State Conference in Melbourne, Anne Flaherty property economist with REA Group (pictured), offered delegates rich insights into the key drivers shaping Australia’s residential property market.

The 12 interest rate rises over the past 18 months have effectively decreased how much buyers can borrow from banks by around 30% and this has driven consumer sentiment to record low levels. While interest rates have remained stable for the last three months, consumer sentiment remains in the doldrums, with people still feeling nervous about the state of the economy.

Against this backdrop, it’s interesting to note that in Victoria, and elsewhere across Australia, house prices have continued to rise.

For example, Melbourne – the weakest performing property market over the last few years – is still up 16% compared to March 2020. Across the greater capital city areas, prices are up 29% and have increased every month this year, while in regional areas growth is even more staggering – where many areas have witnessed 40% plus growth.

To understand why this has happened, we need to look at supply and demand dynamics. We saw the total number of properties listed for sale on www.realestate.com.au plummet.

Admittedly, buyer demand did decrease but not anywhere close to the level of supply of properties listed for sale. This helped maintain a competitive market environment, and those properties that are being listed are seeing very high levels of buyer demand.

August was the first time we actually saw a year-on-year rise, culminating in the busiest finish to the winter period seen in many years

Sellers are returning

However, things do seem to be changing.

While every month this year we’ve seen a year-on-year decline in the total number of properties listed for sale, August was the first time we actually saw a year-on-year rise, culminating in the busiest finish to the winter period seen in many years.

September numbers are yet to be released but to date, it looks as if we’re having a record start to spring, with auction volumes really skyrocketing.

Overall, this is a sign that we’re starting to see some recovery, and a lot of those people who held off selling during the early part of the year are now thinking… ‘Ok, prices are still rising, I know there’s buyer demand out there – I’m going to list.’

We see this in our research as well, and what’s interesting within our survey of property seekers is that the people who feel like it’s a good time to sell – which plummeted to less than 20% over the first half of this year – have significantly improved.

But while this is encouraging it is still sitting well below long-term levels.

Rental markets

The massive shortage of properties to rent is driving up rents.

While there’s a lot of speculation as to why, there are a whole host of issues in the rental market at the moment.

When covid struck we saw rental vacancies surge in Melbourne, due to international students and temporary migrants leaving and people moving to regional Victoria, where the total number of for-lease listings plummeted and rents increased.

Interestingly, before the pandemic had ended and Australia’s international border had reopened, the total supply of rental properties for lease had fallen below pre-covid levels.

In other words, there were fewer available rental properties even though our population was shrinking.

Property investors are exiting

Property investors are a part of the story here.

For example, we’ve seen from 2020 onwards the proportion of all sales [of real estate] by property investors has been increasing.

Private landlords are exiting the market and that has reduced the total supply of rental properties for sale. There are a lot of factors at play here, firstly, during the covid years we saw rents falling and capital values rising, with people selling up and taking a profit.

By comparison, now we have higher land tax, more compliance, higher insurance, detector inspector, and a whole lot of other things, so if we ask landlords how they feel about the market  – they’re not very positive.

Fifty percent don’t believe investing in real estate is as attractive as it used to be, and a third of investors (who currently own) don’t think it’s worth the effort.

This is really disquieting as it implies the continuation of the trend of more property investors selling up.

Clearly, motivation [for investing in property] is different, depending on where people are in their life point. For example, over 60s – who account for the largest share of property investors in Australia – are looking for an income stream.

Even though rents are rising the other costs associated with owner property have increased even more – so net yields have actually fallen and that’s a problem.

With the average buyer only able to borrow 30% less and property prices close to or higher than ever, it’s taking first-home buyers longer to save for a deposit.

Migrants and first-home buyers

Property investors are not the only issue that’s reducing the supply of rental properties at the moment.

We saw around half a million people come to Australia in the past year and we’re likely to continue to see above-average migration rates. Around 70% of people are renters when they first come to Australia and that puts an immediate increase in demand for rental properties.

With the average buyer only able to borrow 30% less and property prices close to or higher than ever, it’s taking first-home buyers longer to save for a deposit.

That transition from renter to first home buyer has never been more difficult and that’s keeping people in the rental market longer.

While the only solution is to build more homes, our research also suggests the demand for new residential constructions is declining.

Headlines about building firms collapsing are making people hesitant to buy off the plan. As a result, the share of Australians confident to buy off the plan has dropped from 45% to 36% within a brief period.