Property recovery forecast for 2023: why Sydney prices will rise again

Aidan Devine |

Sydney’s ailing housing market will bounce back next year with price growth that will lead the country, new economic modelling has revealed.

SQM Research’s annual Housing Boom and Bust report released Tuesday showed Sydney prices were primed for growth over 2023 due to an increase in underlying demand for housing.

The base forecast by the property research group, which has a strong track record for predicting price changes, was for Sydney price growth to be 5 to 9 per cent over 2023.

This level of growth would make Sydney the strongest capital city housing market after a year of being the weakest, with city prices dropping by an average of nearly 7 per cent over 2022.

SQM Research director Louis Christopher said factors that would drive up demand for Sydney real estate next year included a rise in overseas arrivals, rental accommodation shortages and a robust city economy.

He added that the economic outlook for the country was healthy and there was little prospect of mass forced property sales – the kind that would cause a housing market collapse.

“No doubt it will be a very challenging year for the RBA to walk their tightrope and pull off a soft landing for the Australian economy,” Mr Christopher said.

“However, contrary to current popular opinion, I believe they will manage to do just that.”

Australia’s strong economic links with Asian tiger economies and careful fiscal management by the Reserve Bank suggested an economic slowdown rather than a recession, Mr Christopher said.

“That is not to say it won’t be a close call. No question, there will be major uncertainties, for which we have also published scenarios for. The key in our view is where the peak in the cash rate will be.”

SQM’s base forecast assumed the Reserve Bank of Australia eventually put a brake on interest rate rises, was somewhat successful in taming inflation and unemployment remained low.

Included in the assumptions was that interest rates peaked at no higher than 4 per cent (the cash rate is currently 2.85 per cent).

“If the target rate stays below 4 per cent, then it is unlikely we will have a flood of forced sales in the housing market,” Mr Christopher said.

“There is of course a risk the RBA may need to go further. If they do then the risks of a hard landing in the economy do substantially rise and thus, a hard landing in the housing market would also occur.”

Mr Christopher said parts of the Sydney housing market appeared to already be on the road to recovery.

“There have been signals that Sydney’s eastern suburbs has entered into this recovery, particularly for freestanding houses.

“It is also noted, that on SQM’s leading indicators, there has been a moderate rise in the auction clearance rate for Sydney, particularly for Sydney’s eastern suburbs.”

It comes as Reserve Bank governor Philip Lowe apologised to Australians who may regret taking out a home loan off the back of guidance that interest rates would remain unchanged until 2024.

Appearing before a Senate estimates hearing on Monday morning, the governor said it was “regrettable” that the RBA did not make it clear the commentary was conditional on the state of the economy.

“I’m sorry that people listened to what we said and then acted on that and now find themselves in a position they don’t want to be in,” he said.

SQM’s Housing Boom and Bust report included three additional scenarios for 2023 price changes based on interest rates, inflation and unemployment, among other factors.

In a worst-case scenario for homeowners – where interest rates climbed well above 4 per cent, unemployment surged and inflation surpassed 8 per cent – property prices would drop 3-8 per cent next year, SQM noted.

Another prediction, described as a “Goldilocks” scenario, would see the Reserve Bank cut interest rates in the second half of 2023 after successfully pulling down inflation. Were this to happen, property prices would rise 8-12 per cent.

Were inflation to calm down in the first half of 2023, only to accelerate again in the second half of the year, forcing the Reserve Bank to make bigger interest rate rises, the forecast was for 0-4 per cent growth in Sydney property prices.