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    BIS Shrapnel forecasts a two tiered residential property market

    BIS Shrapnel

    Leading property industry analyst and economic forecaster, BIS Shrapnel expects an improvement in residential market conditions following two years of price declines in 2010 and 2011.
     
    However, this 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 excess supply.
     
    According to the company’s Residential Property Prospects, 2012 to 2015 report, things are looking up in the New South Wales market where there is a substantial dwelling deficiency already in place as well as in the resource states, where weak dwelling commencements in recent years and accelerating population growth are now seeing rising dwelling deficiency. Moreover, cuts to interest rates have seen affordability in their capital cities improve to their best levels since the first half of last decade.
     
    BIS Shrapnel senior manager and study author, Mr Angie Zigomanis says that concerns about the direction of the global and local economy as well as employment prospects will keep purchasers in the main centres of these states away through to the end of 2012, despite evidence of a pickup in key market indicators such as vacancy rates and rental growth.
     
    Zigomanis expects the recovery to eventually gain traction through 2013 as continued growth in resource investment spending eventually flows through to other sectors of the economy.
     
    In contrast, conditions in the non-resource states including Victoria, South Australia, Tasmania and Australian Capital Territory will continue to be tough. These states had the strongest bounce in construction after the Global Financial Crisis, which eroded their dwelling deficiency and caused an emerging excess of dwelling stock.
     
    Zigomanis explains that economically, these states are also underperforming due to a fall-off in construction and a negative impact to industry from the high Australian dollar. While improved affordability from lower interest rates may stabilise house prices in this environment, median house prices in Melbourne, Adelaide, Hobart and Canberra are forecast to show little change without any supply pressures and decline in real terms over the next three years.

    Key factors for the fall 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
    • 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 waned after Federal Government stimulus spending wound down, with insufficient new private sector investment coming through to pick up the slack
    • Population growth, and consequently underlying demand for dwellings slowed as net overseas migration inflows fell after 2008/09 in line with 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. Research shows signs of improvement in first home buyer demand since the end of 2011, with loans to first home buyers in the nine months to March 2012 up by 24% in Queensland and 25% 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.
     
    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.
     
    Zigomanis believes improving local economic conditions should be prioritised to have a more substantial impact on purchaser sentiment, while the increased investment and spending in 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 will encourage more first home buyers into the market and existing occupiers to upgrade.
     
    The BIS Shrapnel report does not expect this recovery to 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 3% in these markets in 2010/11 suggest excess supply, low new dwelling construction and acceleration in migration have 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, but it will be moderate over the next three years.
     
    Conditions are also expected to be conducive for a more modest 5% 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.
     
    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 4% than 5%, and emerging inflationary pressures by the end of 2013 are expected to result in a tightened 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 8%, with the ensuing deterioration in affordability and slowdown in the economy bringing about a downturn in the residential market across the board.

    The full report is available on the BIS Shrapnel website.
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