Leading provider of industry research, analysis and forecasting services, BIS Shrapnel does not expect a property price crash despite many capital cities recording a decline in median house prices in the year to March 2011.
Steady prices are forecast through 2011 with some capital cities even showing moderate price growth over the following two years up to 2013.
According to BIS Shrapnel’s Residential Property Prospects, 2011 to 2014 report, various factors were responsible for dampened purchaser demand in the residential market in 2010/11 including falling first-home buyer numbers, which flowed through to weaker upgrader demand, stalling economic conditions and increasing interest rates.
BIS Shrapnel senior manager and author of the study, Mr Angie Zigomanis says that while the fall in first-home buyer demand (down 50% in 2010) can be attributed to 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.
Zigomanis adds that 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.
Highlights of BIS Shrapnel’s Residential Property Prospects:
Improving market fundamentals
First-home buyer outlook
- Economic growth to regain traction through 2011, and continue to accelerate in 2012 and 2013 as resources investment flows through to the rest of the economy
- Strengthening employment growth with falling unemployment rate in 2013 will see net overseas migration inflows turn around with corresponding increase in demand for new dwellings
- Declining new dwelling starts and the corresponding fall in completions to increase deficiency of dwellings nationally
- Dwelling deficiency will cause rental markets to tighten and rental growth to pick up, particularly in weak markets
Spectre of rising interest rates
- Correction in first-home buyer demand will aid improving market conditions
- First-home buyer demand to rise over the next two years aided by strong rent increases, booming economic conditions, and population growth in the 25-34 years age group (mid-2008 trends)
- Pick up in purchaser activity as the recovery in first-home buyers also flows through to upgrader demand
Employment, income and population growth to create momentum
- Pace of interest rate rises will be the key to the residential market outlook
- Moderate initial rate rises (1-2 rises over 12 months) will enable residential turnover to begin recovery
- Purchaser demand will be maintained by improved confidence from strong employment and income growth
- Aggressive early rises in rates (3-4 rises over 12 months) will weaken the residential market as well as its ability to gain traction in a strengthening economy
- Cash rate is forecast to increase by 50 basis points in 2011/12, which will take the variable rate to 8.2% by June 2012
- Both employment and income growth will accelerate, building up momentum in property turnover
- Booming economic conditions post 2011/12 to cause acute inflationary pressures, encouraging the Reserve Bank of Australia to adopt a more aggressive stance on interest rates
- Housing rates forecast to peak at 9.4% by the end of 2013, causing a downturn in both the residential market and the economy over 2014
Moderate price rises
- Prices to stabilise in 2011/12 through a combination of increased purchaser activity, strengthening employment and income growth
- Price stability and rising rents in many capital cities should bring back investors to the market
- Stronger underlying demand caused by rising net overseas migration and population growth in 2012/13 will see the national dwelling deficiency increase, keeping rental growth solid
- Strong employment and income outlook will encourage purchaser demand and maintain upward pressure on prices
- 50 basis points rise in 2011/12 and a single rate rise forecast for the latter half of 2012 will not significantly dampen recovery in activity
- Demand will wane despite booming economic conditions as variable rates push past the 9% level through 2013
- Sydney, Perth and Brisbane will show the strongest price growth through to 2014 among the state capitals
- Strong economic conditions and income growth in Western Australia and Queensland (and to a lesser extent New South Wales) will underpin moderate price rises averaging 5-6% p.a. up to June 2014
- Low affordability in Melbourne, Adelaide, Hobart, Canberra and Darwin where construction has been exceeding underlying demand
- Price levels in these centres expected to be underpinned by strengthening economic conditions
- Median house price in these centres to rise 1.5 - 2.5% p.a. over the next three years and to record declines in real terms