2023 residential property market predictions snapshot
Tony Sass, co-managing director of diversified property, investment and financial services group Oreana Group delivers a snapshot of what the year may bring in residential property development.
- Residential growth corridors to navigate new set of circumstances – some that will test development in new ways, and others that can be leveraged for market advantage
- How developers fare, and what this means for the shape of our communities and the market in general depends on the adaptability of players big and small
- Supply chain challenges including labour shortages to ease in 1H23
- Affordability to be dominant issue of 2023 due to households feeling brunt of interest rate increases and rising cost of living pressures
- Developers to meet affordability challenge in residential market by building homes on lots smaller than 300sqm
- Investors to play a role in delivering housing amid rental shortages
Supply chain presenting good news for buyers
After a horror few years of global supply chain challenges that made it hard to get anything from a TV to a car, let alone tiles and timber, we should see these challenges continuing to ease in the first half of 2023.
This is good news for buyers because this issue has been pushing material costs higher and making new homes more expensive.
In addition, labour shortages should resolve in the second half of the year as building starts thinning out from July onwards, which will make the labour market more competitive and relieve pressure on wages and therefore, housing costs.
As these issues were two of the biggest challenges to navigate in 2022, their resolution is great news for the industry and home buyers.
Rising unaffordability critical
While the resolution of some key supply chain issues will help take some of the pain away for home buyers it won’t stop affordability becoming the dominant issue in 2023.
This is in part due to households feeling the full brunt of interest rate increases as many homeowners come off fixed rate mortgages over the next year at the same time as consumer price inflation is at a 32-year high which is all feeding into the rising cost of living.
We think the cash rate will increase to anywhere from 3.6 to 4.1 per cent and with it will come a large reduction in people’s borrowing capacity. To demonstrate, an average household earning $130,000 a year has already seen its borrowing capacity fall from $925,000 to $750,000, which is a massive shift.
That is likely to deteriorate further in 2023 due to more expected rate increases, potentially reducing borrowing capacity to an even lower $650,000, resulting in a very challenging year for buyers.
Developers must adapt
Developers and builders, including Oreana, will need to adapt to the changing market by delivering more homes on lots smaller than 300sqm to meet the affordability challenge.
We’re already seeing the industry move to smaller lots for the purpose of lowering price points because there is less demand for properties in excess of $750,000 as most buyers can’t afford them.
This means developers need to become smarter about the product they are offering the market including ensuring home design maximises the use of small lots with solutions like homes with maximum indoor-outdoor flow, orientating lots for solar exposure to enhance energy efficiency, and aesthetically-pleasing and diverse architect-designed facades to break up uniformity.
Because of rising unaffordability, investors who may have been waiting on the sidelines have an opportunity to return to the market and add to the rental stock on offer.
Market conditions are ideal due to record low vacancy rates and the return of immigration in 2023, with new arrivals needing to find rental accommodation.
We think there is an opportunity for investors to play a part in producing rental stock that is traditionally at that lower price point and we are positioning ourselves to make acquisitions to meet that demand.
Creating a win win situation
Looking back on 2022, the main lesson to carry into this year is the importance of collaboration within the industry between builders and subcontractors and developers and land sellers.
With these parties coming to the table they can create a win-win situation and work more effectively through pain points, creating a better outcome for all. At Oreana, with this collaborative mindset we’re well placed to deliver on our goals this year. While our diversified business structure and commitment to agility, accountability and execution will see us in good stead as we progress further into 2023.