FYI | Mar 19 2008
By Chris Shaw
With Australian economic growth so far remaining strong even in the face of continued issues in the US economy there remains, according to St George Bank, a chance the Reserve Bank of Australia will yet lift rates higher as it continues to focus on bringing inflation under control.
Even if the RBA does not tighten rates further at its meeting in May the bank suggests borrowers can reasonably expect to have to deal with higher interest rates as a by-product of the ongoing global credit market issues. As evidence of this it notes the spread between 3-month bill rates and the RBA’s official cash rate has blown out significantly in recent months, which is pushing up funding costs.
In the bank’s view this sets the scene for some flow-through impact on the Australian housing sector, even allowing for the fact the property market’s fundamentals remain very solid as evidenced by low vacancy rates and high population growth rates as well as a shortage in terms of the number of new dwellings being constructed compared to demand.
One likely effect of the current level of interest rates is a continuation of the relatively low level of dwelling construction activity as higher rates imply higher construction costs, while there is also scope for investors to become more risk averse in the current economic environment and this may play out in less aggressive bids at property auctions.
Even allowing for these factors the bank notes the Australian housing market retains some positive momentum, with median prices rising 3.2% in the December quarter last year and 12.3% in year-on-year terms, which is the fastest pace of growth since the March quarter of 2004.
For St George Bank this implies there is little risk of a downturn such as is currently playing out in the US housing market, particularly as the Australian economy remains far more supportive and the level of non-performing loans domestically is nowhere near the levels in the US as the sub-prime crisis flows through that economy’s housing and banking sectors.
There will be some impact though, so the bank has scaled back its estimates and is now forecasting house price growth of 5-10% in most markets in the coming year, the possible exception being Perth where prices may grow by less than 5%.
Any cooling in the Melbourne, Brisbane and Adelaide markets could actually be a positive according to the bank as it would help avoid any boom-bust scenario given prices in these markets have risen by at least 18% over the past 12 months.
In terms of any peak in the market the bank notes the Australian housing sector typically has a five-year cycle from trough to peak and as the last low was at the end of 2004 it suggests the market may not top out before sometime late in 2009.
For non-residential property the bank expects CBD office markets will remain in a tightening phase thanks to the strength of the labour market, so office values and rents should continue to push higher. The retail sector should also perform reasonably well as yields continue to firm, though the bank doesn’t see returns at matching those of the last five years.
Increased supply is likely to weigh on the industrial property sector, so the bank expects it will underperform the commercial property sector in coming months.