Australia | Jul 01 2013
-Low rates help but expectations are modest
-Eslake observes absence of "wealth effect"
-Sydney benefits most, Melbourne oversupply
-Canberra market uncertain
By Eva Brocklehurst
Residential property markets will be mixed in the next three years. Some which have strengthened are likely to tail off, others will be flat and there will be an upturn – in some. BIS Shrapnel's Residential Property Prospects for 2013 to 2016 shows NSW should improve and Queensland start to gain traction. The star regions of recent times – Western Australia and Northern Territory – will lose some gloss as they continue to be influenced by resources activity. Elsewhere, underlying economies and excess supply will tell the story.
The low interest rate environment has underpinned an improvement in residential property since 2012. Lending to owner occupiers and investors has been trending higher in the nine months to March 2013. This is outside of a decline in NSW and Queensland, where changes to first home buyer incentives have created a short term dip in demand. Study author Angie Zigomanis expects the impact of lower rates will take more time to inspire greater confidence in home purchasers. Hence, BIS Shrapnel expects a modest improvement in residential market conditions in 2013/14, assisted by any further cuts to interest rates that may occur. A more buoyant economy should develop over 2014/15 as the non-resource sectors take over as the drivers of growth.
For BA-Merrill Lynch's Australian economist, Saul Eslake, the recent rate cutting cycle has had little impact on house prices, an unusual situation in the recent Australian context. Over the rest of 2013, Mr Eslake expects subdued consumer confidence, gradually rising unemployment and, hence, persistent household prudence. House prices will be little changed and, consistent with the BIS Shrapnel view, performances across capital cities will be mixed. Overall, Mr Eslake expects flat to 5% growth in house prices in 2013. Moreover, auction clearance rates, while grabbing headlines and promising the beginning of an uptrend, don't tell the real story. They signal expectations, rather than provide a guide to the direction of prices.
As growth has been soft over the last year, vendors are likely to be more modest about what to expect, while buyers remain cautious and keen to get a discount. The number of transactions has not increased in the year to March, pointing to soft activity despite higher auction clearance rates. Mr Eslake believes the modest recovery in house prices to date has been driven by loan size, up just under 5% in the year to April. In sum, household leverage, because of low interest rates, is driving prices rather than strong sales volumes. Even this is modest. Average loan size has broadly tracked sideways since late 2009.
Here is the conundrum: it may be a good time to purchase a house but a lack of confidence is preventing many consumers from entering the market.
Mr Eslake observes that job losses, particularly in higher profile sectors, are widely reported and weigh on confidence more heavily than the magnitude of the job losses suggests. Combine this with weak house price growth and confidence is dented. Weak house prices are not a problem in isolation but can affect confidence more broadly as there's a correlation with retail sales growth via the "wealth effect". This feeling of prosperity has been absent over the last year. A lack of house price growth can also hold back residential construction. Potential participants show no urgency to buy a new home when house prices are not rising consistently.
So, where's the most robust residential markets? For 2013/14 and 2014/15, according to BIS Shrapnel, the answer lies in NSW, Western Australia, Queensland and Northern Territory. Nationally, the deficit of dwellings is around 83,000 and as at June 2013 this is confined to these four states/territories. The deficit is also driving up rents and, together with weak price growth, has resulted in improved yields.
It's toughest in Victoria, South Australia, Tasmania and Australian Capital Territory. These four experienced strong peaks in construction in recent years that exceeded demand for new dwellings. Mr Zigomanis also found these regions were underperforming economically, because of falling construction and the high Australian dollar. The end result is that median house prices in Melbourne, Adelaide, Hobart and Canberra will show little change and a decline in real terms over the next three years. Canberra will also feel the effects of additional downside, as it depends on public sector employment after the federal election.
Sydney – looks like benefiting from a sizeable deficit in the housing stock and better affordability because of low interest rates. The rate of price growth is expected to strengthen and affordability is at its best level since 2001. The city's strength is the outcome of a sustained period of under building, resulting in low vacancy rates and strong rental growth since 2007. Mr Zigomanis finds the improved yields and the reduced gap between rental income and mortgage repayments is attracting investors back to Sydney in larger numbers. On the negative side, first home buyer numbers have fallen, mostly the result of successive changes to the incentives by the NSW government, which has pulled demand forwards. First home buyers are expected to move back to more usual levels in 2014, adding to dwelling turnover and driving slightly stronger growth. Price growth out to June 2016 is expected to be 19% or a moderate 5.9% per annum.
Perth – the estimated median house price of $520,000 represents a rise of 7% in the year to June 2013. Improvement has coincided with a pick up in first home buyer demand, up 30% in the year to March 2013. Demand at the more affordable end is translating to higher price points as existing home occupiers trade up. This is also assisted by strong income growth and, with reduced interest rates, a significant improvement to affordability. This price growth is expected to last 12-18 months before the Western Australian economy slows more sharply. In 2015/16 sentiment in the residential sector should turn in line with economic conditions. Median house prices are expected to rise by 15% over the three years to 2016, primarily in the first 18 months of that period.
Brisbane – may sustain only limited growth in 2013/14 but accelerate in 2014/15 as Queensland's economic conditions improve. Brisbane experienced a run up in house prices and construction in the first resources boom which was followed by weak migration and population growth that prevented any excess supply being absorbed. Mr Zigomanis estimates the Queensland residential market has an emerging deficit, as signalled by rental vacancies tightening to 2.1% in March 2013 from 3.9% in 2010. Once it appears the market has definitely found a bottom, turnover should increase as purchasers seek to enter the market ahead of further price increases. A return to price growth in 2013/14 should accelerate in 2014/15 and stay solid to 2016. The rise in median house prices is forecast to be 17% to 2016, representing an average rise of 5.2% per annum.
Darwin – should have enough momentum in 2014 but rates of price growth are forecast to slow from 2014/15. This is because investment in resource projects will work through and unemployment start to rise, coupled with a slowdown in migration and population growth. Median house prices have been underpinned by a substantial increase in resource sector investment. The median price estimate of $595,000 at June 2013 represented a 4% rise for thee year. There are strains developing, according to Mr Zigomanis. First home buyer demand recorded its first year-on-year decline in February 2013. A modest 10% rise in median house prices to June 2016 is expected, just above the rate of inflation.
Melbourne – the median house price of $545,000 at June 2013 represents a 4% rise for the year. BIS Shrapnel expects this improvement was underpinned by reductions in interest rates rather than any fundamental drivers. Record levels of new dwelling construction from 2009/10 and strong supply of apartments exceeds underlying demand. The other factor for Victoria is the high Australian dollar, notwithstanding the latest drop. The high exchange rate has affected manufacturing sector employment and, as major construction winds down, growth drivers will be subdued. This is evidenced by the price growth in 2012/13 that was concentrated in inner and middle suburbs, where population was less exposed to the weak sectors of the economy. Mr Zigomanis thinks that low interest rates should counteract the weakness enough to keep prices firm. Price growth is expected to be 5% over 2013-2016 and, after accounting for inflation, actually fall 4% in real terms.
Adelaide – the estimated median house price of $398,000 at June 2013 represents a 1% increase for 2012/13, after a 3% decline in the preceding year. Construction in the years after the GFC exceeded demand and the excess supply has been reflected in vacancy rates, in turn affecting rents and prices. The SA economy also weakened with the high Australian dollar and declining building activity. Mr Zigomanis views Adelaide as the most affordable of the mainland state capitals and reduced interest rates should keep price growth slightly positive over the next three years. The dwelling oversupply is expected to be absorbed at the end of this period but the prospect of the next tightening cycle could then delay an upturn. Median house prices are forecast to show 6% growth out to 2016, a 3% decline in real terms.
Hobart – over building has coincided with weakening demand as a net inflow in migration in 2009/10 turned to net outflow in 2011/12. The median house price has fallen by 6% to $360,000 in June 2013 from a peak of $383,500 in December 2010. Migration has largely come from those seeking a "tree change" who are close to retirement and have sold homes on the mainland. Weak residential conditions in the mainland capitals and a deteriorating Tasmanian economy have reduced the impetus for this "tree change" and there has been a steady level of departures by the younger population to the mainland. Excess supply is expected to persist over the next three years and growth in median house prices is likely limited to 4%, reflecting a decline of 5% in real terms.
Canberra – the median house price is estimated to have fallen 1% to $490,000 in the year to June 2012, a 7% reduction from the March 2011 peak. A dwelling deficit has shifted to an excess, which should increase as the larger apartment projects are completed. Purchasers are also not stepping up to the plate as employment prospects in the nation's capital become uncertain in the lead up to the federal election. Mr Zigomanis expects downward pressure on prices as a result. Nevertheless, the city has the highest income of the capitals and affordability is not constrained. This should prevent major price declines and the median house price forecast is expected to be flat over the three years to June 2016.
At the end of the three year period, all markets are likely to be affected to varying extent by rising interest rates. The Reserve Bank is expected to push the cash rate up from the current stimulatory level towards a more neutral setting over 2015 and 2016. Early rises in the rate are expected to have little impact but a cumulative rise over two years should eventually affect residential demand. As such, rising rates will slow Sydney and Brisbane and contribute to further weakening in Perth and Darwin. It will also postpone any recovery in prices those cities that have been flat over the preceding years.
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