Property industry analyst BIS Shrapnel has forecasts a two tiered residential property market recovery, with NSW and the resource state capitals to improve while the other capitals to remain weak.
After two years of price declines in 2010 and 2011, the economic forecaster says that the fundamentals are beginning to favour an improvement in residential market conditions.
However, that improvement will not be uniform across the states, with New South Wales and the resource states of Western Australia, Queensland, and Northern Territory beginning to show signs of recovery, while conditions in the remaining non-resource states will continue to be dampened by underperforming economies and an excess supply.
That news is also tempered by another major report that has just been released.
Australia’s housing shortage has been called into question after 2011 Census figures released last week showed the number of households in Australia is almost 1 million less than the official National Housing Supply Council (NHSC) estimates.
Some economists suggest this is evidence of overpriced housing and a situation that will possibly undermine a significant rebound in residential building activity.
Image: From National Housing Supply Council via Business Day
Meanwhile, architects such as Peddle Thorp design architect Peter Brook claim the regulatory demands placed on developers are contributing to the high housing prices reaching “absurd levels”.
BIS Shrapnel’s Residential Property Prospects, 2012 to 2015 report
The report says New South Wales, has a substantial dwelling deficiency already in place; and in the resource states, where weak dwelling commencements in recent years and accelerating population growth are now seeing a rising dwelling deficiency emerge.
“Moreover, outside of their brief low point in 2009, cuts to interest rates have seen affordability in their capital cities improve to their best levels since the first half of last decade,” a statement reads.
BIS Shrapnel senior manager and study author, Angie Zigomanis, says that purchasers in the main centres of these states will nevertheless continue to remain shy through to the end of 2012 due to concerns about the direction of the global and local economy, as well as their employment prospects - despite evidence of a pickup in key market indicators such as vacancy rates and rental growth now coming through.
“The recovery is expected to eventually gain traction through 2013 as continued growth in resource investment spending eventually flows through to other sectors of the economy,” says Zigomanis.
“With the local economic and employment outlook becoming more positive, and some stabilisation and improvement overseas, purchasers are forecast to wade back into the market in greater numbers, translating to greater sales volumes and a pickup in price growth over 2013/14 and into 2014/15.”
In contrast, conditions in the other non-resource states (Victoria, South Australia, Tasmania and Australian Capital Territory) were forecast to continue to be tough. These states all had the strongest bounce in construction after the Global Financial Crisis, with the result being an erosion of their dwelling deficiency and/or an emerging excess of dwelling stock.
“Economically, these states are also underperforming due to a fall off in construction and a negative impact to industry from the high Australian dollar,” says Zigomanis.
“The improvement in affordability from lower interest rates may stabilise house prices in this environment. However, without any supply pressures, median house prices in Melbourne, Adelaide, Hobart and Canberra are forecast to show little change and decline in real terms over the next three years.”
Housing prices will remain high unless infrastructure demands lessen - Peddle Thorp design director Peter Brook
Governments at all levels are now placing demands on developers for infrastructure such as electricity sub-stations, roads, and drains, and then imposing huge rates and charges as well, according to the architect.
Brook says the prices of housing in Australia had now reached absurd levels.
“Lowering of interest rates was only one part of the equation for returning housing prices to some form of sanity,” he said.
“People have concentrated on interest rates, yet the impact of rate decreases pales into insignificance compared to the regulatory demands placed on developers.”
Brook said all these costs had increased greatly over time and are passed onto the consumer in the end.
“Planning regulation has reached the point where it is now strangling an already struggling industry. It is an expensive waste of time.
“What we need is a uniform set of planning laws across the country that deal with how buildings are located, and what building standards are needed.
“Developers are increasingly being asked to pay for basic infrastructure to get a building even started.
“With planning regulation and costs centered around vague concepts such as neighbourhood character, we find costs escalating and there seems to be no end to this insanity.”
More from BIS Shrapnel
The analyst says that a number of factors were responsible for the falls in prices over 2010 and 2011:
First home buyer demand halved, after demand had been largely pulled forward into 2009 to take advantage of generous Federal and State Government incentives — which were introduced to stimulate the housing market after the Global Financial Crisis — prior to them expiring;
Variable interest rates increased by two percentage points between October 2009 and November 2010, which together with the rebound in price growth over 2009/10 resulted in a deterioration of affordability;
Economic growth began to wane after Federal Government stimulus spending wound down, with insufficient new private sector investment coming through to pick up the slack; and
Population growth, and consequently underlying demand for dwellings, slowed as net overseas migration inflows fell after 2008/09 in line with the weaker economic conditions, which in turn contributed to the dwelling balance in a number of states moving into oversupply.
However Zigomanis says many of these negatives are beginning to turn around. First home buyer demand has been showing signs of an improvement back to normal levels — albeit slowly — since the end of 2011 as the ‘pull forward’ effect is worked through, with loans to first home buyers in the nine months to March 2012 up by 24 per cent in Queensland and 25 per cent in Western Australia over the same period last year.
The 100 basis point reduction in variable interest rates in 2011/12, together with house price declines, have seen affordability improve substantially. Overseas migration has been showing a strong recovery over 2011/12, while the latest GDP data suggests a more positive economic result.
Zigomanis says despite these improving signs, any upturn in the residential market is being stymied by pessimism in relation to the outlook for the economy and employment prospects.
“While overseas economic conditions are expected to remain challenging, improving local economic conditions should move to the forefront of people’s minds and begin to have a more substantial impact on purchaser sentiment,” says Zigomanis. “At the same time, the increased investment and spending in the mining and related sectors of the economy should increasingly flow through to the domestically focussed non-mining sectors of the economy, leading to stronger employment growth.
“The increased confidence is forecast to encourage more first home buyers into the market and existing occupiers to upgrade. Investors should also increasingly enter the market once there is evidence that prices have bottomed out, and will also be supported by solid rental growth.”
BIS Shrapnel says this recovery will not be uniform. Conditions over the next three years will be strongest in the two markets that have been weakest in recent times, Perth and Brisbane. While vacancy rates of above three per cent in these markets in 2010/11 suggest an excess supply, low new dwelling construction and an acceleration in migration (both overseas and interstate) has seen vacancy rates quickly turn around as they have moved into an expanding deficiency. Price falls over 2010/11 and 2011/12, together with recent interest rate reductions, have also seen affordability improve significantly. With the strongest economic prospects over the next two to three years, rising income growth will support the recovery in prices. Nevertheless, the recovery will only be moderate (averaging around six-to-seven per cent per annum) over the next three years.
Conditions are also expected to be conducive for a more modest (around five per cent per annum) improvement in prices in Sydney and Darwin over the next three years. Affordability is not as attractive in a long term sense in these states, although a substantial deficiency of dwellings should maintain solid rental growth and continue to encourage owner occupiers and investors into the housing market.
Improving domestic economic conditions should see prices stabilise in Melbourne, Adelaide, Hobart and Canberra in the next 12 months. However, with less exposure to the better performing resource sectors of the economy, these states are expected to continue to experience challenging economic conditions, while solid levels of construction in recent years have resulted in these markets being close to balance or in oversupply. Without any supply pressures, barely any movement is expected in prices over the next three years, with median house prices forecast to fall in real terms.
Nevertheless, moving out towards the end of the next three year period, all markets are forecast to be impacted by rising interest rates. The strengthening economic environment will be reflected in the unemployment rate falling closer to four per cent than five per cent, and emerging inflationary pressures by the end of 2013 are expected to result in a tightening in interest rate policy.
While early rises will have limited impact in a strengthening economy where incomes are rising, they will eventually begin to cause affordability to become strained. The rate of price growth is forecast to peak in the first half of 2015, by which time variable rates are forecast to push back past eight per cent, with the ensuing deterioration in affordability and slowdown in the economy bringing about a downturn in the residential market across the board.
Outlook for price growth by region
Sydney
Sydney’s estimated median house price of $640,000 in June 2012 represents a one per cent decline over 2011/12, after also being more or less flat over 2010/11. The residential market in Sydney has been weak now for the best part of the last decade, with the estimated median house price of June 2012 being 11 per cent below the peak in March 2004 in real terms. As a result, home loan affordability has also improved, with BIS Shrapnel’s measure of affordability indicating that — apart from when interest rates were at record lows in 2009 — it is at its best level since 2001.
New dwelling construction in Sydney remains well below the level required by population growth, and this has been evident in the low vacancy rates and strong rents rises since 2006. However, although dwelling commencements have increased from their 50 year lows in 2008/09, they are not expected to reach a level to erode the dwelling deficiency sufficiently to cause vacancy rates to ease. Therefore, rental growth should still remain solid in the next two to three years.
“This deficiency will eventually encourage investors back into the Sydney market,” says Zigomanis. “Once there is evidence that prices have bottomed out and sentiment improves, the return of price growth will in turn promote further investor demand. After showing signs of a turnaround in 2012/13, price growth should pick up in 2013/14.
“We are forecasting total price growth in Sydney over the three years to June 2015 to be 17 per cent, or a moderate 5.4 per cent per annum.”
Newcastle and Wollongong
Residential property prices in Newcastle and Wollongong are significantly lower than across Sydney. As the deficiency of dwellings in the Sydney market increases, and affordability deteriorates due to a combination of rising prices and higher interest rates, these markets are likely to benefit from a higher inward migration of residents from the state capital. Total growth in the median house price in both Newcastle and Wollongong over the three years to June 2015 is forecast to be similar to Sydney, at 17 per cent.
Melbourne
Despite improving in line with lower house prices and reductions in interest rates in 2010/11 and 2011/12, affordability in Melbourne has been more challenging relative to the other capitals after the city recorded the strongest post-GFC bounce in prices of 27 per cent in 2009/10. The upturn in prices also coincided with an upturn in new dwelling construction, with commencements reaching record levels in 2010/11 and exceeding annual underlying demand.
Together with the dampening effect of a subdued state economic environment in 2011/12, this has placed downward pressure on prices, with Melbourne’s estimated median house price of $540,000 in June 2012 representing a decline of five per cent for the year.
“With Melbourne’s dwelling deficiency being eroded, there is little upward pressure on prices,” says Zigomanis. “We anticipate that prices will stabilise in 2012/13 due to the impact of lower interest rates and an improving outlook for the national economy. However, there will be little to support price growth in the city over the next three years and conditions will continue to remain tough.
“Median house price growth in Melbourne is forecast to be minimal, totalling three per cent over the 2012 to 2015 forecast period. After accounting for inflation, prices are actually forecast to fall by six per cent in real terms.”
Brisbane
Brisbane’s estimated median house price of $430,000 in June 2012 represents a one per cent decline for the year, following on from a five per cent decline in 2010/11. This reflects the weakness in this period of the state economy due to the completion of a number of big non-residential and engineering projects related to the mining sector and severe flooding in parts of the state at the start of 2011. Affordability had also become strained after a run up in house prices to 2008, with these factors combining to dampen both overseas and interstate migration into Queensland. Underlying demand consequently fell to below new dwelling construction and the market has been in oversupply.
However, with new dwelling construction in Queensland collapsing to below GFC levels, Zigomanis estimates the Queensland residential market began to move into a deficiency in 2011/12. This has been reflected in vacancy rates that have now moved below the balanced market rate of three per cent, and are expected to underpin a recovery in rental growth. Affordability has also improved. The recent declines in prices have resulted in Brisbane’s median house price being 11 per cent below its peak, while the reductions in interest rates will have also assisted affordability.
“The Queensland economy is also now beginning to turn around with the next round of investment in new resource projects coming through” says Zigomanis. “Consequently, economic conditions are forecast to rapidly improve, with the ensuing employment and income growth to create a greater level of purchaser confidence.
“As a result, we should start to see a return of price growth in 2012/13, which will accelerate into 2013/14 as the economic upturn gains traction and the underlying dwelling deficiency becomes more pronounced. By the end of 2014/15, rising interest rates will again begin to impact on prices, but only after a forecast total rise of 20 per cent in the median house price over the three years to 2015, representing an average rise of 6.2 per cent per annum.”
Gold Coast and Sunshine Coast
House prices on the Gold Coast and Sunshine Coast have generally moved in tandem with Brisbane, benefiting from the same drivers of population growth as the capital; that is, primarily net interstate migration inflows and, to a lesser extent, overseas migration.
With interstate migration into Queensland now at long term lows, the residential markets on the Gold Coast and Sunshine Coast have weakened considerably. Affordability relative to the eastern state capitals has also deteriorated in recent years. Given both these centres do not have the same employment drivers as Brisbane to attract migrants, the current affordability disadvantage will result in price growth being slightly lower than for Brisbane over the three years to June 2015, totalling a forecast 13 per cent, or 4.2 per cent per annum.
Townsville and Cairns
The median house price in Townsville has held up better than in Cairns since the worst period of the GFC in 2009. While both local economies were impacted by falling resources investment, sharp declines in residential construction and a weak tourism sector, the more diversified economy in Townsville has served to better support prices.
Both centres are expected to benefit from the rising investment in the resource sector over 2012/13. With both Townsville and Cairns offering services to these mining projects, as well as a base for employees in and out of the projects, population growth should benefit with a rising shortage of dwellings emerging until new supply catches up. Moreover, the improvement in local economic conditions should also see confidence improve after a period of weakness. Townsville should expect a greater upside to its recovery due to its more diversified economy, although both markets should experience moderate price growth.
Cumulative price growth over the three years to 2015 is expected to be 18 per cent for Townsville and 15 per cent for Cairns.
Adelaide
Adelaide’s estimated median house price of $390,000 at June 2012 represents a four per cent decline for the year after a one per cent decline in 2010/11.
“Construction in South Australia has been exceeding underlying demand,” says Zigomanis. “With state economic conditions also underperforming compared to national growth, the result has been downward pressure on prices.
“Nevertheless, with Adelaide being the most affordable of the mainland state capitals, the reductions in interest rates should also assist affordability and stabilise the price falls. While expanding mining projects such as Olympic Dam will have a positive impact on the state economy, they will take some time to ramp up and ultimately be reflected in the residential market, particularly until the excess dwelling supply is absorbed and a deficiency re-emerges.”
As a result, the residential market in Adelaide should remain challenging, with the median house price forecast to show only limited growth totalling nine per cent over the three years to 2015, which is actually equivalent to a one per cent decline in real terms.
Perth
Perth’s estimated median house price of $475,000 at June 2012 represents a decline of one per cent in 2011/12. Apart from a brief post-GFC rebound in 2009/10, the median house price in Perth has experienced consistent declines since peaking in March 2007. The June 2012 estimate is a 12 per cent decline in real terms from the March 2007 peak.
The sustained weak market was due to affordability becoming extremely strained at its peak (Perth became the second-least affordable market in Australia in 2007), which was subsequently compounded by weaker underlying demand as overseas and interstate population slowed immediately after the GFC and resulted in pockets of oversupply emerging. However, BIS Shrapnel says that the market is now poised to turn around.
“Strong income growth in Western Australia through the downturn in prices, together with reductions in interest rates over 2011/12, has resulted in affordability improving significantly,” says Zigomanis. “Population growth is already accelerating as Perth also benefits from rising overseas and interstate migration and, combined with recent weak new dwelling construction, has resulted in vacancy rates tightening from 3.5 per cent at June 2011, to 1.9 per cent in March 2012.”
“With unemployment in the state already leading the nation at 3.8 per cent in March 2012 and economic and income growth to continue to strengthen, the first stages of a turnaround should appear in 2012/13 before stronger price growth emerges in 2013/14 and 2014/15 as economic growth approaches a peak.”
BIS Shrapnel is forecasting Perth house prices to rise by 22 per cent over the three years to June 2015, representing a rise of just under seven per cent per annum.
Hobart
House prices in Hobart have been weak over 2010/11 and 2011/12, reflecting weakening state economic conditions and the emergence of an excess supply after the post-GFC stimulus to new dwelling construction. Hobart’s estimated median house price of $357,000 at June 2012 represents a decline of four per cent for the year.
While dwelling activity and price growth in Tasmania has been supported by net interstate migration inflows — mainly attributed to the ‘tree change’ as residents on the mainland considering retirement sold their homes and downshifted to Tasmania — a deteriorating state economy appears to be resulting in departures of the younger population to the mainland centres.
“Tasmania’s net interstate inflow has now reverted to a net outflow,” says Zigomanis. “This will slow population growth, meaning the current excess supply will continue to persist over the next three years.”
As a result, growth in Hobart’s median house price is forecast to be limited to five per cent over the 2012 to 2015 forecast period, reflecting a decline of five per cent in real terms.
Canberra
Canberra’s median house price is estimated to have been relatively steady at $525,000 in the year to June 2012.
Canberra has experienced one of the strongest new dwelling markets over the last two to three years as strong investment demand has fed through to record levels of new dwelling activity. It is estimated the Australian Capital Territory’s dwelling deficiency is now shifting to a mild excess of stock, particularly as the larger apartment projects are working their way through to completion.
“The combination of dissipating pent up demand pressures, together with the impact of rising interest rates, will have a dampening effect on prices,” says Zigomanis. “In addition, employment growth is also likely to slow considerably as the Federal Government moves to bring the budget back into surplus.
“Nevertheless, Canberra has the highest incomes of the capital cities and affordability is not as strained. This should prevent any major price declines, with the median house price forecast to be more or less flat over the three years to June 2015 (a total rise of one per cent), which reflects a decline of eight per cent in real terms.”
Darwin
Darwin was the only capital city to record a rise in its median house price through the worst of the GFC, with prices underpinned by resource sector projects that were already underway and contributing to the local economy. The rise in prices led affordability to reach almost its worst point on record in 2010.
However, with existing mining expansion projects winding down and local economic conditions weakening, Darwin’s median house price fell by seven per cent over 2010/11.
House prices have stabilised in 2011/12, with BIS Shrapnel’s estimate of the median house price of $540,000 at June 2012 representing a five per cent rise for the year.
“Confidence appears to be returning with the announcement of major new resource sector investment, and this should maintain the momentum in the house price growth that is emerging as local economic conditions strengthen,” says Zigomanis “The supporting employment and population growth should see the dwelling deficiency in Darwin also become more acute with greater pressure on vacancy rates and rents.”
“As a result, we anticipate a rise of 15 per cent in median house prices in the three years to June 2015, with affordability again potentially re-emerging as an issue towards the end of this period as interest rates rise.”
