Strong demand and lower interest rates are likely to see Sydney’s median house price surge above the $2 million mark according to new analysis.
Forecasts by Oxford Economics Australia have predicted that the Sydney median house price will rise from $1.6 million to over $2 million by 2027.
Notably, Sydney units are predicted to outperform houses during the same period rising 22 per cent over the next 3 years
Oxford Economics Australia predicted that affordability pressures, huge overseas immigration, and weak apartment completion volumes would only intensify competition and drive up prices of units.
Oxford Economics senior economist, Maree Kilroy, said despite higher interest rates making it tougher for buyers in Sydney and across the country, a fundamental undersupply of properties has created upward price pressure.
“The Australian housing market was caught between two opposing forces in 2023 – higher interest rates and a fundamental undersupply of dwellings. The weight of demand eventually won out,” she said.
“You have a fundamentally undersupplied market and with net overseas migration running at half a million people, a growing participation by foreign buyers, downsizers and cash buyers, demand has outweighed that drag that interest rates would typically have.
“Expectations of rate cuts later this year have also propped up buyer confidence in early 2024.”
She said that towards the end of last year, the Sydney market was losing momentum, despite previously believing the softness would continue into 2024, it appears that the trend has reversed and prices are again rising.
“I think that expectations of rate cuts this year have boosted buyers’ confidence and there’s a sense that demand is soaking up the increased listings as evidenced by the price growth, which, I think, is a bit of a sugar hit from the improved optimism around the cash rate,” she said.
Should interest rates fall in the short term, housing affordability would improve across all markets. Sydney would be one of the big winners of lower interest rates as it is the market that is most sensitive to interest rate movements, given the high level of mortgages that are required to buy into the Sydney market.
The lower rate will reduce the portion of income needed to pay a mortgage in Sydney by 7.1 percentage points to 48.2 per cent according to Oxford Economics.
However, if interest rates do fall, the buying window might only be short. If falling rates boost sentiment and encourage more buyers, then property prices will rise quickly. That was one of the key drivers of the COVID boom when interest rates effectively fell to zero.
In reality, for buyers the time to be looking to get into the market is before the influx of new demand that would come from a rate cut or even the perception of a rate cut.
With predictions of falling rates later this year, buyers would be well served starting to look at getting into the market now, before the RBA has a chance to pull the trigger on another interest rate cutting cycle.
