Australia | Dec 15 2008
By Chris Shaw
With the global economic outlook continuing to worsen, ANZ Banking Group head of property and financial system research Paul Braddick has lowered his growth forecasts for the Australian economy. 2009 is now just 0.6% and in 2010 he expects 2.0%, while he sees unemployment rising to 6.5% by the end of that year.
Despite these poor numbers, Braddick notes the Australian housing sector has held up well, with housing prices having fallen just 2.1% since March this year. For the year to September, prices are actually up 2.8%. Braddick expects this support for housing prices will continue thanks to the recent cuts in official interest rates and improving affordability from higher first home buyer grants. The latter should in turn lift demand and generate increased developer interest.
As well, Braddick notes Australia is still experiencing a significant shortage of housing, as while underlying demand remains strong thanks in large part to record net international migration rates, the supply side is not keeping up thanks to limited land availability, developer uncertainty and infrastructure charges that in many cases are simply excessive.
To put this into perspective, Braddick estimates underlying housing demand in Australia is now at around 185,000 dwellings annually. Completions in 2008/09 are likely to be closer to 140,000 as new home building continues to weaken.
This is flowing through into a very tight rental market, with vacancy rates at record lows and rents and rental yields continuing to rise sharply.
Despite these positives, Braddick sees some risks remaining, especially given the expectation unemployment will trend higher in the coming year. This suggests there could be an increase in forced sales, while tighter credit conditions may act to restrict actual demand for housing.
Factoring all this in sees Braddick forecast a softening in median house prices of between 0-5% over the next year. This assumes the Australian economy manages to avoid a deep recession. Given this assumption, Braddick expects a rapid recovery once the current economic uncertainty has run its course.
Having previously shown some signs of improvement, the Sydney market is again looking at risk as the financial environment implies little improvement in capital values in the coming year. Braddick notes there are reports prices at the top end especially are falling sharply.
With median prices higher in Sydney than in any other market, it leaves this market more vulnerable, says Braddick. This is especially so given the potential of increased forced sales. Melbourne, in contrast, has shown greater resilience thanks to better affordability. This is evidenced by solid levels of activity with respect to housing priced near the median.
Given state government bonuses and the increased first home owners grant, Braddick sees good medium-term prospects for the state, particularly as the Victorian economy continues to perform solidly and unemployment rates have not yet picked up when compared with New South Wales.
In contrast, the Queensland market has come to a rapid halt in recent months and house sales have fallen 15% in the year to September. Clearance rates are now in the low-20% range. Median prices have also weakened, down 3.3% in the September quarter, thanks in part to an adequate supply of housing entering the market.
Given the diverse nature of the Queensland economy, Braddick sees it as being able to avoid the worst of any economic downturn. The strong fundamentals in place, such as above average migration rates and improving affordability should mean solid medium-term prospects in his view.
For the year to September, the Adelaide housing market has been the best performing market in the country and median price falls have been small compared to other state capitals. Braddick expects a stabilising of the market in coming months, but notes while affordability may improve, the broader state economy will still face risks.
The Western Australian property market has already stalled, as transaction levels have fallen on the back of a poor affordability situation following strong gains in recent years. Median prices have fallen 4% for the year to September and with commodity prices falling, Braddick expects further market consolidation shorter-term. However, he retains a positive view on the longer-term outlook.
The Tasmanian market has also slowed significantly in recent months and given its affordability it is the best of the capital cities. With a reasonable economic outlook for the state ,Braddick expects the property market will remain solid going forward, with scope for prices to continue to push modestly higher.
In the ACT, activity levels around median price levels have remained solid, while the high end of the market has slowed in recent months. Braddick sees a further slowing as a proposed reduction in public employment should mean a reduction in demand.
Prices in Darwin have enjoyed an increase of 4% over the past six months, the strongest rise of any capital city in Australia thanks to strong population growth and a relatively high population turnover. As Braddick notes, this is creating more pressure in the rental market than in sales, but with the longer-term outlook remaining favourable, he expects median prices to remain supported.