Australia | Jun 23 2014
-Strongest price growth in NSW, Qld
-Melbourne facing headwinds
-Gold, Sunshine Coast move to deficit
-Tasmania gains "tree changers"
By Eva Brocklehurst
Tight markets have been a catalyst for strength in house prices in Melbourne, Sydney, Perth and Darwin over the past 12 months. Affordability is still sufficiently attractive at current interest rates to maintain further price growth, for now. Rising construction has not yet tipped the supply ratio far enough the other way.
BIS Shrapnel's Residential Property Prospects 2014 to 2017 report suggests that the potential for oversupply in many Australian markets, and an eventual tightening of interest rates, will create the conditions for price declines by 2016/2017. The report author, Angie Zigomanis, observes the current standard variable rate of 5.95%, outside of the emergency rates in 2009, is the lowest level in over 40 years. As a result affordability remains at the levels of the early 2000s. Low interest rates have, however, had a minimal impact on first home buyer demand, which has weakened considerably as state governments, with the exception of Western Australia, have removed incentives for established dwellings in favour of targeted incentives for new dwellings. Demand has been underpinned by more mature buyers and investors.
The rate at which house prices will continue to rise will vary across the capitals. The report shows the strongest conditions are in NSW and Queensland, where there are sizeable deficiencies in the dwelling supply. The rate of price growth in Melbourne should slow in response to new supply and emerging affordability pressures. The rapidly softening economies of Western Australia and Northern Territory are expected to slow the growth of house prices in Perth and Darwin. South Australia, Tasmania and the ACT are expected to be flat.
Mr Zigomanis believes the changeover to domestic demand from resource investment in order to drive the economy will be slow but should show a positive impact on employment in 2015. This may support prices for houses but it will also herald the beginning of higher interest rates. Initial rises in official rates are unlikely to have a large effect, with the economy strengthening, but subsequent rises should significantly affect affordability and prices throughout 2016.
Nationally, BIS Shrapnel anticipates 184,000 new dwellings will be started in 2013/14 and 190,000 in 2014/15. Total dwelling construction compares with an average underlying demand for 151,000 new dwellings per annum over the next five years. The deficiencies in most states should therefore begin to erode. As a result, BIS Shrapnel expects all markets to weaken by 2016/17, with the level of weakness depending on any dwelling deficit that still exists and how strained affordability is when interest rates peak.
Where will the strongest house price growth be over the next three years? BIS Shrapnel expects it will be Brisbane, where affordability has improved significantly and a low rate of dwelling construction means a sizeable deficit is in place. Brisbane's median house price, as of this month, is 7.0% below its June 2010 peak in real terms. Still, economic conditions remain relatively subdued. A forecast peak in interest rates is expected to slow price growth by 2016/17 but price declines are not expected, given the undersupply of dwellings.
Interstate migration to Queensland is at long-term lows and BIS Shrapnel expects this to continue affecting demand for Gold Coast and Sunshine Coast property, as affordability relative to eastern state capitals is not as attractive as it once was. Still, an extended period of weak construction rates means these markets are now moving into undersupply and vacancy rates are tightening. Large construction projects such as Pacific Fair, Commonwealth Games plans for the Gold Coast and the Sunshine Coast University Hospital are expected to contribute to local employment and further price growth is expected of around 13% in both markets over the years to 2017. Further north, Townsville is weakening, given the impact of the falling resource sector investment, while the downturn in Cairns since the global financial crisis has now stabilised.
Sydney's momentum should continue as the market is still estimated in deficit and prices are not forecast to decline until 2016/17. By June 2017 only Brisbane and Sydney are expected to have experienced any growth in house prices in real terms over the preceding three years. BIS Shrapnel is forecasting total price growth in Sydney over the period to be 10%, concentrated in the next two years. Residential property prices in Newcastle and Wollongong usually benefit when Sydney experiences strong growth and migration to these centres increase. As affordability in Sydney's outer suburbs is not overly constrained at current interest rates, price growth in Newcastle and Wollongong is forecast to be moderate, accelerating in 2015/16 as interest rates tighten and begin to reduce affordability in the capital.
Melbourne's market has been underpinned by strong migrant inflow from both overseas and interstate. Population growth has matched the elevated level of new housing supply that has come into the market. With net overseas migration now trending down, and new dwelling construction strong, BIS Shrapnel expects apartment vacancy rates will increase over 2014/15. Moreover, Victoria faces headwinds in its manufacturing and construction sector that will dampen the state's economic conditions, in Mr Zigomanis' view. Median house price growth in Melbourne is forecast at 8.0 per cent over 2014-2017. Ex inflation, prices are actually forecast to fall by 1.0 per cent.
Perth's first home buyer market, in contrast to the other states, remains strong as there has been only limited changes to state incentives. Still, Mr Zigomanis finds evidence the market in Perth has begun to slow and the peaking of resource sector investment is affecting net migration, from both overseas and interstate. Price growth should be modest in Perth at 3.0% over the next three years which, in real terms, represents a decline around 6.0%.
Hobart's growth in median house pries is forecast to be limited to 4.0% over the next three years, reflecting a decline of 5.0% in real terms. Excess supply is expected to persist. Net interstate migration outflow, because of Tasmania's weak employment environment, is expected to start being offset by increased "tree change" migration from NSW and Victoria. These migrants are expected to increasingly take advantage of price gains on the mainland to sell homes and move to Tasmania.
Canberra's oversupply is expected to be sustained for some time and affect prices. As the city has the highest average income of the capitals, and affordability is not as constrained, there should not be any major price declines. Darwin's median house price growth was 18% over 2012/13, underpinned by a substantial increase in resource sector investment, led by the Ichthys LNG project. BIS Shrapnel expects price growth will be slowing there as affordability comes under strain. Total growth in the median house price at around 3.0% is forecast for the three years to June 2017, which should result in a real house price decline of 5.0%.
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