Despite many capital cities recording a decline in median house prices in the year to March 2011, economic forecaster, BIS Shrapnel, is forecasting steady prices through 2011, with some capital cities even showing moderate price growth over the following two years to 2013.

According to the company’s Residential Property Prospects, 2011 to 2014 report, in 2010/11 the residential market was hit by a ‘perfect storm’ of falling first-home buyer numbers - which flowed through to weaker upgrader demand, stalling economic conditions and increases in interest rates. All of which coincided to dampen purchaser demand.

BIS Shrapnel senior manager and study author, Mr Angie Zigomanis, says while the focus of the fall in first-home buyer demand (down 50 per cent in 2010) has been higher interest rates, the main reason was actually a substantial ‘pull forward’ of first-home buyers into 2009 due to expiring government incentives. This then flowed through to weaker upgrader demand as there were fewer purchasers in the market for their existing dwellings.

“These movements in the property market coincided with the economy stalling due to government stimulus tapering off, and the resources boom yet to gain traction,” says Zigomanis.

“The combination of weaker demand, a more uncertain economic outlook, weak consumer confidence and prospects of further interest rate rises has resulted in weaker house prices.”

Improving market fundamentals

However, unlike some other market commentators, BIS Shrapnel is expecting the situation to improve from 2011/12.

“Economic growth is forecast to regain traction through 2011, and continue to accelerate in 2012 and 2013 as resources investment flows through to the rest of the economy,” says Zigomanis.

“Strengthening employment growth — the unemployment rate is forecast to fall below four per cent in 2013 — will also see net overseas migration inflows turn around, and the underlying demand for new dwellings begin to rise.

“With new dwelling starts currently declining, the corresponding fall in completions means the underlying deficiency of dwellings nationally will increase,” adds Zigomanis.

“This will underpin the strength of residential conditions, causing rental markets to tighten and rental growth to pick up, particularly in those markets where it has been weakest in the last couple of years.”

First-home buyer outlook

Aiding improving market conditions will be a correction in first-home buyer demand, which should begin to revert back to long-term averages as the ‘pull forward’ effect is worked through.

In the period leading up to variable rates peaking at 9.6 per cent in mid-2008, first-home buyer demand also continued to rise, and peaked at its highest level since 2001/02, when the original First Home Owner’s Grant was introduced. During this period, first-home buyer demand was aided by strong rent increases, booming economic conditions, and population growth in the 25 to 34 year old age group — the main first-home buyer demographic. BIS Shrapnel says this is again expected to be the case over the next couple of years, with a subsequent pick up in purchaser activity as the recovery in first-home buyers also flows through to upgrader demand.

“Potential first-home buyers will not stay out of the market forever,” says Zigomanis.

“At some point many will reach a life stage where they will want their own dwelling. If higher interest rates mean they can’t afford their first choice of dwelling initially, then they will purchase a more affordable type of dwelling and/or in a more affordable neighbourhood.

In any event, this period will allow future first-home buyers to build up their deposit and take advantage of softer house prices.”