Australia | Jun 15 2010
By Chris Shaw
Price growth for Australian residential properties is likely to slow this year according to industry analyst and economic forecaster BIS Shrapnel. The group has released its “Residential Property Prospects, 2010 to 2013 report”, which suggests rising interest rates will have an impact on both affordability and prices.
Higher interest rates are already causing an easing in lending activity, BIS noting first home buyer demand in the March quarter of 2010 was down 44% on the same period last year. Upgrader activity also appears to be settling, both of which are flowing through to softer demand for residential property.
BIS senior project manager and report author Angie Zigomanis suggests there are a combination of factors behind the stalling of momentum in house prices, including the expiry of the First Home Owner's Grant Boost Scheme, a resulting slowing in upgrader demand and a further deterioration in affordability. The latter reflects both higher prices and sharp increases in interest rates.
In the second half of 2009 house prices responded to variable interest rates being at 40-year lows, but according to Zigomanis the fact the variable rate has subsequently risen to 7.4%, near to long-term trend rates, suggests the recent pace of price growth is not sustainable.
BIS doesn't see house prices falling, as investors are now returning to the market and should act to pick up some of the reduction in owner-occupier demand. Data are indicating this process is underway, Zigomanis noting loans to investors were up by 26% in annual terms in the March quarter of the year.
Investor demand should be sustainable, Zigomanis pointing out there remains an ongoing deficiency of dwellings in the Australian property market even though overseas migration inflows are steadily easing. This should keep vacancy rates for rental properties low, so delivering stronger rental growth later this year.
What should also keep investors interested in the market in BIS's view is that the current round of interest rate rises is expected to have run its course. Further rate hikes should be more modest, Zigomanis forecasting the cash rate will increase by 50 basis points in 2010/11 and by a further 50 basis points in 2011/12.
In Zigomanis's view an expected more stable interest rate environment should underpin the confidence of purchasers, especially as economic conditions continue to strengthen. As a result he expects moderate house price gains should continue.
This is based on his view the gain in prices experienced in most cities in the second half of 2009 has essentially front loaded price growth this upturn, so over the rest of the cycle price gains should be somewhat flatter.
Such an outcome would be different to the normal cycle of price growth, Zigomanis pointing out the beginning of the upturn usually delivers moderate price growth. This accelerates to a peak at the end of the cycle as economic growth also peaks.
With prices having jumped in 2009, followed by a total 1.5% increase in the cash rate, housing affordability has now returned to 2007 levels on Zigomanis's numbers. This lack of affordability should hang over the market for the near future, limiting price gains to the mid-single digit percentage range over the next three years in his view.
In terms of where the most solid price growth will come from, BIS suggests those capital cities starting from the lowest price base will see the best gains. With real house prices in both Sydney and Perth still below previous peak levels these markets should see stronger growth relative to other capital cities in the group's view.
Price levels in Adelaide are also below those of the other mainland capital and so this market should see better growth than other cities, while BIS expects more moderate growth in the Brisbane, Hobart and Canberra markets due to weaker underlying demand and specific economic conditions.
In both Melbourne and Darwin prices are at very unaffordable levels and this should limit further rises according to BIS.
In terms of price specifics, BIS expects a median house price in Sydney for June 2010 of $615,000, which would be a 12% increase for the year but would be 10% below peak levels. Such a price would imply affordability had returned to levels seen in 2002. BIS expects price growth over the next three years of 20%, which equates to average annual growth of around 6%.
House prices in both Newcastle and Wollongong remain significantly lower than in Sydney and so BIS expects these markets to experience stronger growth later in the cycle as prices in Sydney encourage migration from that more expensive market. Through to June 2013 BIS expects total price growth of 18% in Newcastle and 17% in Wollongong.
For Melbourne BIS estimates a June 2010 median price of $550,000, prices gaining 3% this year to date and 26% in 2009 on its numbers. This means affordability is low, something the group sees as limiting growth in median house prices to 11% in the three years to June 2013.
Median prices in Brisbane are up 11% for the year to $465,000, though BIS notes this comes after prices fell in 2009. The combination of a lagging economy and weaker interstate migration, together with lower affordability, should limit total price growth through to June 2013 to 12% in the group's view.
Prices on both the Gold and Sunshine Coasts have generally moved in tandem with those in Brisbane and BIS expects this trend will broadly hold in the coming three years as well. Both Cairns and Townsville should do a little better, BIS forecasting cumulative price growth for the former of 16% and for the latter of 17% through to June 2013.
The median house price in Adelaide as at the end of June is forecast to be $410,000, which would be a gain of 14% for the year. BIS expects stronger economic conditions and relatively lower prices compared to other capitals will see growth in this market of 20% over the next three years.
In Perth the median price of $500,000 represents a gain of 11% in annual terms, though BIS notes prices remain 3% below the peak of December 2007. Solid growth is expected to continue, the group forecasting a cumulative gain of 22% over the next three years.
An annual gain of 16% has BIS expecting the median house price in Hobart at at the end of June will be $390,000. With prices getting close to the most affordable of state capitals, BIS expects further growth will be modest, its forecast calling for an increase of 12% over the next three years.
In the Canberra market the forecast median price stands at $520,000, up 16% for the year. But with stimulus measures expected to end through this year there is likely to be an impact on employment, so BIS expects more modest growth in coming years. Its forecasts call for an increase of 14% between now and June 2013.
Only Darwin among Australian capitals did not experience any house price declines through the economic downturn and BIS estimates the median house price currently sits at around $570,000 This is a gain of 23% for the year.
It also means prices are now at their most unaffordable levels recorded on BIS's measures, which together with strong investment activity and a widening in vacancy rates is expected to dampen price growth in coming years. BIS forecasts total price growth of 12% through to June 2013.
