2024 Property Outlook: Analysing the impact of inflation, tax cuts and market dynamics

property market

This year, there are many unique factors that could influence the property market. Exploring how these elements might impact property prices is intriguing.

Of course, the longer-term outlook is important for investors, as it better aligns with their investment horizon. Short-term market expectations likely hold more relevance for potential vendors.

Markets hate uncertainty

The dominant theme influencing investment markets in 2024, including the property market, revolves around inflation and interest rates. Uncertainty looms over the direction of inflation. Will it decline or remain sticky? This uncertainty is pivotal in assessing whether interest rates will remain steady or potentially decrease, and when.

Goods inflation has normalised post the Covid-induced buying surge, but the challenge lies in services inflation. Higher wages will only fuel services inflation further, potentially keeping interest rates at their current levels for a more extended period.

Adding to these risk factors are the Stage 3 tax cuts scheduled for implementation on 1 July 2024. Individuals earning over $200,000 annually stand to gain a $4,537 tax cut. Projections estimate that this measure could inject between $20.4 billion and $24.7 billion into the economy, roughly 1% of GDP. This injection of cash will probably contribute to an increase in discretionary expenditure and contribute to inflationary pressures. In fact, ANZ estimate the economic impact of the tax cuts to be equivalent to two 0.25% rate cuts in terms of their likely stimulus effect.

Discretionary vendors will keep stock levels low

Given the uncertainties regarding interest rates and inflation, the property market may not be appealing to discretionary vendors. A discretionary vendor is a property owner that would like to sell but is not under any time or financial constraints to do so. Most vendors are discretionary vendors.

I expect most discretionary vendors will delay selling due to lower demand from property buyers. The CBA Home Buying Index, a gauge of home purchase intent, has experienced a two-thirds decline since its peak. Notably, property buyer demand is currently 40% lower than its pre-Covid levels in 2019.

This will keep property listings low, especially in blue-chip locations. The lower listings will in return underpin prices and growth and should keep clearance rates around 60%.

Impact of rising rents

Rents surged by approximately 10% last year and show no signs of slowing down. A chart I shared last year indicated that rent growth has been below average over the past 15 years, providing a longer-term perspective on the recent increase.

The persistent shortage of rental properties is a key factor driving rents higher in 2024. While we might not experience another year of double-digit growth, it’s likely that rents will rise by high single digits.

As rental costs increase, the attractiveness of property ownership over renting intensifies. While it may not have reached that tipping point yet, the trend is expected to edge closer in 2024. Furthermore, if interest rates are reduced, this could incentivise more renters to transition to property ownership, particularly boosting demand for apartments. As such, I anticipate that apartments could perform better than houses over the next few years, especially since apartments are the cheapest that have been since 1980 relative to houses, as illustrated below.

Borrowing capacity challenges

The other factor dampening buyer demand is borrowing capacity, particularly for investors.

Banks are required to assess the affordability of investment loans using a benchmark interest rate of around 10%. To secure a $1 million loan, property investors must demonstrate the ability to cover annual repayments of $109,000 (calculated at 10% over 25 years). This stringent requirement effectively excludes lower-income earners from entering the property investment market, contributing to widening wealth inequality.

In 2023, owner-occupier loan volumes increased by 10%, while investment loan volumes saw a 27% rise, albeit off an unusually low base. Given this scenario, it is unlikely that banking regulators will be inclined to lower the benchmark rate unless there is a significant fall in borrowing activity. Consequently, borrowers may need to await potential interest rate cuts by the Reserve Bank of Australia (RBA) to enhance their borrowing capacity.

Fixed rate cliff was a non-event

This time last year many commentators were writing about the fact that many Australians were coming off very low fixed rates and rolling onto much higher variable rates. Forecasters expressed concerns that this may cause a lot of financial stress, forced sales which may cause property prices to fall. I strongly disagreed with this view for the reasons I outlined in early March 2023 here.

As of now, most ultra-low fixed rates have expired, yet arrears rates have remained relatively unchanged. This is a reminder of the importance of exercising caution when considering commentaries and predictions, particularly from individuals lacking practical experience in the relevant field or aspect they are forecasting.

Expected growth in 2024

In 2024, I anticipate a general rise in property prices, albeit at a slower rate than the previous year.

Perth will likely be the standout market as it was in 2023, for the reasons I discuss here.

Conversely, I expect Melbourne to continue underperforming compared to other major cities. Having thought deeply about it, my best guess is that the primary reasons for Melbourne’s underperformance could be attributed to concerns with the Victorian government. This concern stems from its tendency to implement new regulations without prior consultation. Additionally, there’s a suspicion among property investors that the state’s burgeoning debt may lead to increased property taxes, such as land tax and stamp duty.

What needs to happen for prices to rise strongly in 2024?

There are two potential scenarios that could lead to stronger-than-anticipated property price growth in 2024.

Firstly, if the RBA decides to cut interest rates earlier than expected. This might occur if the RBA becomes concerned that it has pushed rates too high and wants to cut to avoid pushing the economy into a recession. In such a case, property investors might interpret this as a signal that borrowing costs are set to decrease, making property investment more affordable.

Secondly, an easing of borrowing rules by banks or banking regulator could also stimulate the property market. This might involve actions such as reducing the benchmark interest rate, eliminating interest rate premiums charged on investment loans and relaxing policies related to interest-only loans.

Although these two scenarios are plausible, I consider them unlikely.

Longer term returns are a lot more important

Property is a long-term investment because you must hold it for 2 to 3 decades to benefit from the power of compounding capital growth, as depicted in this chart. Consequently, investors should prioritise decade-long projections over short-term commentary.

The reality is that Australia’s long-term property market fundamentals are very robust. I emphasised this perspective last year, predicting that the median house price in Melbourne is likely to surpass $2 million by 2032. The strength of our economy and robust population growth contribute significantly to this positive outlook.

This is a good market to buy in IF you can find the right asset

The most straightforward time to purchase property is in a stable and balanced market, where determining a property’s intrinsic value is more straightforward due to relatively stable prices. Additionally, in a buoyant market, there is a lot more buyer competition. Therefore, I believe that 2024 will be a favourable year to buy property. The main obstacle, however, will be the availability of suitable properties that align with your criteria, given the expected scarcity of discretionary vendors.  

The Australian’s Money Puzzle Podcast

Stuart joined editor, James Kirby on The Australian newspaper’s Money Puzzle podcast on 16 January 2024 to discuss our outlook for the property market in 2024.