FYI | Jun 27 2011
– BIS Shrapnel expects moderate residential price growth through to 2014
– Residential property prices to benefit as economic growth picks up, lifting demand
– Best gains expected in the Sydney, Perth and Brisbane markets
By Chris Shaw
According to BIS Shrapnel's 'Residential Property Prospects, 2011 to 2014' report, the Australian residential market was hit by a perfect storm in 2010/11. This included a fall in first home buyer numbers, a corresponding fall in demand from the 'upgrader' category, increases in interest rates and stalling economic conditions.
Despite the perfect storm, which saw a decline in median house prices in many capital cities in the year to March 2011, BIS Shrapnel doesn't expect a property price crash. Rather, the expectations is for steady prices through 2011 before some capital cities show moderate prices growth in the two years to 2013.
Report author Angie Zigomanis suggests while higher interest rates have been the focus of the fall in first-home buyer demand, which was down 50% in 2010, the main reason was a substantial pull-forward of buyers in 2009 due to expiring government incentives.
This pull-forward has then translated into weaker demand from the 'upgrader' segment, as Zigomanis notes there have been fewer purchasers in the market for their existing dwellings.
The situation is expected to improve from 2011/12 as economic growth is expected to regain some traction this year before accelerating from 2012. This pick-up should reflect resource investment flowing through to the rest of the economy, while a strengthening in employment growth should see a turnaround in net migration. This is expected to translate to a pick-up in underlying demand for new dwellings.
As new dwelling starts are currently declining, the anticipated pick-up in demand will tighten the rental market. As rental growth increases, this will underpin the strength of residential conditions.
With respect to the first home buyer outlook, Zigomanis expects a reversion to long-term averages as the pull forward effect of 2009 is worked through. Higher interest rates should not be a major deterrent, as Zigomanis notes this has not historically been an issue for rising first home buyer demand.
As an example, Zigomanis points out in the period leading up to the peak in variable interest rates in the middle of 2008 first home buyer demand also rose, peaking around the same time at its highest level since 2001/02.
What helped demand during this period was strong rent increases and economic conditions, along with population growth in the 25-34 year old age group. This group is the main first home buyer demographic.
Zigomanis suggests potential first home buyers are unlikely to stay out of the market forever, so the current period will allow future first home buyers to increase their deposit as they take advantage of softer prices.
A key for residential markets in Zigomanis's view is the pace of interest rate increases, as a moderate pace of increases such as one or two more hikes over the next year will likely see some confidence return as economic growth strengthens.
This should see a building in momentum, as improved confidence from strong employment and income growth should see purchaser demand maintained. In contrast, a more aggressive pace in rate increases would further weaken the residential market, preventing the market from gaining much traction even as the economy strengthens.
Zigomanis favours the former, expecting the cash rate will increase by 50 basis points in 2011/12. This would put the variable rate at 8.2% by June next year, a level seen as insufficient to be a tipping point for the market. Beyond 2011/12 stronger economic conditions are forecast to lift inflationary pressures, forcing the Reserve Bank of Australia (RBA) to turn more aggressive with respect to rate hikes.
Zigomanis expects the variable rate will peak at 9.4% by the end of 2013, with rates at this level to bring about a downturn in both the residential property market and the broader economy over the course of 2014.
The pick up in prices from 2012 is likely to be moderate, Zigomanis attributing this to strained affordability levels in the market at present. BIS Shrapnel expects best performance through to 2014 will come in the Sydney, Perth and Brisbane markets, as these markets are currently building new dwellings at a rate well under that of underlying demand.
At the same time price growth in these cities has been relatively weak in recent years, which has meant an improvement in affordability levels. Zigomanis expects economic conditions and income growth will be strongest in WA and Queensland and solid in NSW, which should underpin price rises averaging 5-6% annually for the three years to June 2014.
Regional centres near these cities such as Wollongong in NSW and the Gold and Sunshine Coasts in Queensland are expected to see annual growth of slightly lower levels.
Affordability in Melbourne, Adelaide, Hobart, Canberra and Darwin is close to long-term lows, while Zigomanis notes construction has exceeded underlying demand in most of these markets. This suggests prices will be supported primarily by strengthening economic conditions.
BIS Shrapnel is forecasting median house price increases in these markets through to June 2014 of 1.5-2.5% per annum.
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