Not that long ago, Australia was in the midst of the fastest drop in housing values on record, as rapidly increasing interest rates caused capital city values to plunge more than 9% in the space of about 10 months.

That’s all changed since hitting a low in February, with three consecutive months of positive growth in housing values due to a significant imbalance between supply and demand. So, less than a week out from winter, what’s the outlook for Australia’s property market?

Resilience: Competition is rife

There’s not a lot of competition in the market for vendors currently with decade-low listing numbers. It’s one of the reasons selling conditions have strengthened, as evidenced by above average clearance rates, faster selling time and less negotiation. For context, the total number of homes listed for sale nationally is tracking 28% below usual. When listing volumes are very low, selling conditions strengthen, which means potential vendors thinking about selling may well be tempted to list now rather than waiting until the traditional spring period, when activity surges and there’s a spike in competition to sell.

Rising prices: Sustainable or not?

Home values for the four largest capital cities all recorded an increase in housing values from the lows recorded in February. A mid-month update based on CoreLogic Australia’s daily Home Value Index showed the upswing gathering momentum, especially in cities such as Brisbane where the index is up 1.0% over the past four weeks. Sydney however is still leading the charge. Considering housing affordability measures remain stretched such a strong rate of growth is surprising and probably unsustainable.

Clearance rates: Low supply vs high demand

Auction clearance rates have been holding at 70% or higher in recent weeks and volumes are slowly on the rise at a time when they would traditionally start to drift lower. Coupled with the upwards pressure on housing values these signs suggest, if anything, the market is gathering momentum rather than slowing down. The stronger clearance rates along with other vendor metrics like faster selling times for private treaty sales and reduced discounting rates, indicate sellers are getting a little bit more leverage back.

Buyer motivation: Urgency and FOMO on the rise

Fear of Missing Out (FOMO) or buyer concern about being left behind was at its peak when the market was in full flight in 2021. While the trend is not back, yet, it does appear that some buyer demographics are highly motivated to get into the market. If the trend for low advertised stock levels, rising clearance rates and higher values continues, it would not be surprising to see FOMO becoming more pervasive. As demand picks up against strong overseas migration and extremely tight rental markets, there’s likely to be some renters who try to fast track their purchasing decisions as well. The pool of available properties they’re competing for is the smallest it’s been in more than 10 years. A sense of urgency will likely play a part in some decision making over winter.

Challenges: Interest rates and market sentiment

Demonstrating an ability to service a loan is going to be one of the biggest hurdles that prospective buyers will face this year. Interest rates are high, but assessment levels are three percentage points higher again. However, qualifying for the loan is only one challenge. We can’t ignore low consumer sentiment levels, which will also be having some dampening effect on the market’s current exuberance and we shouldn’t expect to see a material lift in property activity until there’s an improvement in consumer confidence more broadly.

Wavering confidence: Economic uncertainty

If the RBA were to cut interest rates there is a good chance we would see a lift in consumer spirits, accompanied by a substantial pick up in both buyer and selling activity.  Logically, lower interest rates would be the catalyst for a further uptick in housing values. Of course, we’re not expecting a rate cut anytime soon and there’s speculation that rates may even rise a little bit further this year. Economists are split on their forecasts with predictions for further rate hikes, some stability and some cuts later this year. All of this is likely to be adding to uncertainty and low consumer confidence levels, however any reduction in rates will likely be the cue for more buyers and sellers to become active again.

Homeowner resilience: Mortgage repayments remain steady

We would be naive to think there isn’t going to be a rise in motivated selling or increase in mortgage arrears in the short to medium-term. However, coming off record low rates, most banks were reporting 90-day arrears rates of around 0.5% to 0.6% at the end of 2022. That benchmark is set to increase, however most homeowners or borrowers will do their best to pull back sharply on discretionary spending before missing mortgage repayments or selling their home.

After winter, what’s next?

Spring 2023 is going to be interesting. Historically, it’s the season for new listings and sales transactions, but that activity didn’t materialise for spring last year. There’s possibly some accrued supply building up from people who have been thinking about selling but holding back, and if the market remains relatively buoyant we could see a very active spring this season.  A material increase in advertised supply could dampen values and clearance rates as more homes come on the market.