The price–led housing upturn that emerged at the start of last year and sustained despite multiple rate rises finished 2023 on a more mixed note.

Our latest Housing Pulse finds price momentum continuing overall but with relativities shifting between states. A surge in population growth is still the main underlying driver but strained affordability is starting to have more impact both in aggregate and on performances across price tiers within markets.

Dwelling prices are tracking towards a 10% gain for the full year across the major capital city markets.

While we still anticipate a slowdown in 2024, the stronger momentum looks likely to carry a little better near term, price is growth now expected to come in at 6% next year compared to 4% previously.

Aside from stretched affordability, a slowdown in aggregate population growth and shifts in internal migration and household formation will shape performances in the next two years.

Risks to outlook

But there are many risks to this outlook. Markets may have defied rate rises in 2023 but could struggle to do so again if rates rise again in 2024.

Our central case view also has a modest interest rate easing from the second half of 2024 – markets will lose more traction if this is not forthcoming either.

While our central case view is that there will be sufficient easing in inflation to allow the Reserve Bank (RBA) to leave rates on hold in the near term, consumers continue to brace for further rate rises in the year ahead.

There are two other risks are worth mentioning.

The first is the nature of the 2023 price upturn which (see table) has been associated with a relatively small rise in mortgage debt, implying buyers are putting more of their own funding towards purchases.

In other words, households have been increasing their equity holding of housing rather than their leverage.

It’s unclear exactly where this equity is coming from – it may be the extra savings accumulated during the pandemic or a reallocation of other assets such as super (both of which may be flowing intergenerationally to support younger buyers).

Either way, it is unclear if this increased contribution (and lower average loan–to–valuations) can be sustained.

If not, prices could retrace.

The second risk is that the affordability picture may be more nuanced at the ‘median’ price we use to benchmark.

Buyers at this point tend to be dual–income households.

Many may be able to command higher combined incomes due to labour market conditions and increased work from home flexibility. If sustained, that may in turn mean affordability is less stretched than it appears and prices less susceptible to slowing.

Dwelling purchases: funding

Outlook for turnover

The outlook for turnover is less convincing.

Our Westpac Consumer Housing Sentiment Index suggests some lift is likely near term but the detail continues to show a heightened tension between extremely weak buyer sentiment and positive price expectations.

In some markets, this tension looks to be resolving towards weaker sales volumes and a loss of price momentum. In others, turnover is lifting slightly and appears better placed for moderate gains.

NSW led the broad upturn and is giving clues to where it is headed with stretched affordability already weighing on turnover and price growth.

Victoria’s more muted recovery has flattened as the market struggles to absorb an investor sell–down following recent state government policy changes.

Meanwhile, Qld, SA and WA are all showing better momentum in terms of both prices and turnover and will be clear frontrunners next year, with WA showing the best prospects.

Tasmania continues to be a notable exception without an upturn so far, its performance highlighting the importance of population growth in the current cycle.

A more fragmented market

Australia’s housing upturn has carried into year–end but is changing in complexion. It remains primarily price–led, with turnover still relatively low and only showing mixed gains.

All markets show some tension between supply shortages – as strong population–driven demand coincides with subdued building – and increasingly stretched affordability.

This looks to be tilting towards a slowdown in areas where prices are most stretched. But even in markets where upturns are sustaining, the price detail shows a clear affordability–driven shift in the relative performance of different segments.

According to the Westpac–MI Consumer House Price Expectations Index, a large outright majority of consumers (over 70%) expect prices to continue rising over the next 12 months.

Around 20% expect prices to hold flat while only 9% of consumers expect declining prices.

Meanwhile, Nationally, the Westpac Melbourne Institute ‘time to buy a dwelling’ index edged up 1.5% over the 3 months to November, unwinding some of the sharp 5.9% fall over the previous 3 months.

At 73.2 the index remains near extreme cyclical lows, the long run average being 121.6.

State-by-state overview

NSW – buyers retreat: The NSW market exemplifies the tensions running through the current housing upturn and provides a pointer to where other markets may be heading in 2024. Prices have posted more gains over the last three months to be 12% above their cycle lows, having led the way in the current upturn.

However, recent months have shown a clear cooling in price momentum and auction results, with a sharp fall in turnover suggesting buyers are starting to baulk at extremely stretched price levels.

NSW consumer: housing–related sentiment

Victoria – investor selldown: While demand is the shaky aspect of the NSW housing market, in Vic it is a surge in on–market supply led by what looks to be a significant sell–down by investors following recent state government policy changes.

The changes include new land tax charges for investment properties that come into effect from 2024 but are couched as temporary measures to reduce the state’s ‘covid debt’.

Vic consumer: housing–related sentiment

Queensland – tight squeeze ahead: Qld’s housing market continues to move through a volatile price cycle, strong gains in early 2022 giving way to an abrupt contraction in the second half of the year, then a gradual recovery in early 2023 accelerating sharply since May.

Turnover has seen similar but less extreme variations.

The most striking feature of the Qld market continues to be an extremely low level of supply.

With new building subdued and net international and interstate migration inflows running at 120–130k a year – more than 1.5 times previous record highs – the state is facing into a very tight squeeze.

Qld consumers: housing–related sentiment

Western Australia – price boom: WA’s housing upturn is moving into ‘boom’ territory. Price growth is now running at a strong double–digit annual pace and turnover is firming, albeit moderately.

As elsewhere, sentiment shows a clear tension between stretched affordability and positive price expectations.

However, Perth looks to have more ‘headroom’ around affordability than other markets, price growth having lagged behind average household income growth over the last decade.

With both ‘on–market’ and rental supply very tight, the state looks set to be the housing ‘frontrunner’ going forward.

WA consumers: housing–related sentiment

South Australia – robust upturn: SA is seeing a fairly robust upturn with steady price gains and a solid rebound in turnover.

However, conditions are not quite as buoyant as they were at the tail–end of the last upturn when SA was the stand–out performer and price growth was running at over 20% [annually].

While the supply shortages that were a big factor back then are still a clear issue, demand is looking less vigorous – the migration–driven population surge having less of an effect in SA and the 2021–22 price boom meaning affordability is considerably more stretched coming into the current upturn.

That said, both prices and turnover are posting a solid lift.

SA consumers: housing–related sentiment

Tasmania – a notable exception: The Tasmania housing market is a notable exception to the upturns being seen in other markets and highlights the importance of population growth in explaining recent performances.

Both prices and turnover have only just stabilised after more pronounced downturns than in other markets with conditions still looking fragile.

In contrast to the strong inflows seen in other states, net international and interstate migration has slowed materially in Tasmania during the post–covid reopening, the state’s population growth falling from 1.7% [annually] in mid–2021 to around 0.7% [annually] currently.

Tas consumers: housing–related sentiment