Australia | Apr 24 2007
By Chris Shaw
Whether or not the Reserve Bank of Australia (RBA) lifts interest rates when it meets next month there can be little doubt the three increases in official rates last year have contributed to a tightening of the housing market.
As the financial systems analysis team at ANZ Bank notes, the hikes have impacted on developer sentiment in the marketplace, the result being new dwelling approvals have fallen to around 140,000 in annualised terms, well below estimated demand of around 170,000.
This in turn has driven rental vacancies down to around 1.4% from 3.8% just three years ago, the bank expecting a further fall to below 1.0% by the end of the year. Given the trend on vacancies rents are expected to increase, which should bring investors and developers back to the market.
The bank notes there have been some early signs of this, as auction clearance rates have been improving and housing prices continue to push higher. Such a trend is expected to continue, though the bank’s view is any further increases in rates could push out the timing of the real rebound in the sector to 2007/08.
In the bank’s view there is potential for a further two hikes in rates this year, but even this won’t be enough to stop the property market from moving higher as the pent-up demand for accommodation will need to be filled even as affordability continues to decline.
On the bank’s forecasts housing prices should again exhibit solid growth this year, following on from last year’s 8.3% increase, particularly as household wealth levels are still strong thanks to low unemployment and a strong equity market.
As with the broader economy the housing market state-by-state has shown uneven performance, with New South Wales having endured falling prices and approval rates given the state’s tougher economic conditions. There are signs of improvement though, as rental vacancies are among the tightest and should spark renewed development in the medium-term in the bank’s view.
In contrast the Victorian housing market performed well in 2006 with prices increasing by more than 8% and the bank sees further gains ahead. While it notes development activity is unlikely to pick up until next year at the earliest if interest rates go higher, the state’s population growth all but ensures a solid market in coming months.
Supply and demand in the Queensland property market are broadly in balance, but strong economic growth has maintained the upward trend of the housing market. The bank sees affordability as the major issue going forward, but ongoing gains in the labour market and from the commodities boom should continue to support growth in property prices.
South Australia’s market is also broadly balanced but the state suffers in comparison to Queensland from lower growth and rising unemployment, so the bank sees limited potential for gains in housing prices over the next year or so.
In contrast Western Australia continues to face a sizable housing shortage, with vacancy rates potentially at critical levels by the end of the year. Given house prices have more than doubled over the past three years, the bank sees something of a softening or consolidation phase over the next six months and the fall in affordability should help limit further price gains in its view.
Tasmania recorded a flattening of housing prices in the second half of last year as the state’s growth dropped away, the bank noting this has carried on into the first few months of this year and kept a lid on finance for approvals. It suggests this trend is likely to continue, leading to weaker prices over the next year or so.
As in most other states the ACT has experienced a building downturn in activity following the increases in interest rates, though with financing levels picking up and the market still fairly tight the bank expects house prices to find some support around current levels.
While the commodities boom is supporting housing prices in the Northern Territory the bank sees limited downside, but any fall in activity from a slide in commodity prices could signal a more significant correction in its view. Shorter-term a fairly flat market is expected, the bank seeing some deceleration in house price growth this year.