A new report from Knight Frank predicts double digit growth in 2023 for the majority of Australia's major residential markets.

A new report from Knight Frank is predicting double-digit growth in 2023 for the majority of major residential markets.

It looks like only a few cities – Darwin, Canberra, regional Victoria, and regional South Australia – will see growth below 10%.

According to the report, population growth, a rise in the number of households renting, and a supply crunch are all contributing to the increase in rent.

On top of that, the tight rental market is expected to coincide with a correction in residential property prices, which have grown by 20% since the pandemic.

But the report also predicts that every capital city will see “positive capital growth” once the Reserve Bank starts cutting rates next year.

Population growth and an increase in the number of households renting have contributed to demand in the housing market, according to the report, which notes that population growth has risen by 4.6% over the past five years.

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It further pointed to a decline in new dwelling construction and divestment of rental properties by investors contributing to a supply crunch in the housing market. The report also notes that severe weather events have taken homes offline and removed them from rental pools across the country.

According to Knight Frank, the trend in vacancy rates over the past five years shows that the supply crunch has had a major impact on the rental markets.

“Over the past five years, vacancy has averaged 2.7 per cent in Australia’s capital cities and 1.7 per cent throughout regional Australia.

“By mid-2022, however, vacancy had contracted to a very lean 2.1 per cent in capital cities, and 1.2 per cent in the regions. This is the lowest vacancy rate for capital cities since 2010, whilst regional Australia saw only a modest rise from the 0.9 record low in March 2021,” it explained. 

According to the global real estate agency, the tight rental market will coincide with a further easing in residential property prices.

After years of strong capital growth fueled by government stimulus, rising household savings, and low interest rates, the housing market is now heading towards a correction, says the report.

“Since the pandemic, Australian residential values have grown by 20 per cent. Although since March 2022 values have fallen by 4.6 per cent as the cash rate has shifted substantially to higher to tackle elevated inflation, providing a catalyst for the market to eastwards a more sustainable level of annual growth over the coming years.”

Although capital growth is expected to ease as the Reserve Bank resumes its cash rate cycle in 2024, the report predicts that every capital city will see “positive capital growth” once the RBA begins cutting rates next year.

While the focus has shifted away from capital value growth, sustained rental growth has led to more attractive gross yields, with the gross rental yield of Sydney residential homes rising the most of all cities in the past two quarters.

While landlords may have a good year, the report warns that tenants will continue to struggle with high rental prices and difficulty finding a place to live. Knight Frank predicts that the supply shortage will be hard to resolve and rental displacement will likely increase in the coming years due to an influx of skilled migrants.

However, the report also offers hope, stating that the trend of higher yields will continue in 2023 and help boost investor demand and development in the market.