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Property market to take a hit

by Robin Christie | 30 Jun 2015- FINSIA ARTICLE

Low interest rates are expected to continue to drive short-term property market growth in undersupplied markets, but a fall in prices could kick in from 2017 in many areas.

This is the assessment coming from BIS Shrapnel's latest report, 'Residential Property Prospects, 2015 to 2018'. The report notes that tightening interest rates, rising supply and deterioration of affordability will create conditions for price declines in a number of cities from 2017, but offers the reassurance that doomsday predictions for the residential market are likely to be overblown.

Rather than experiencing a dramatic crash, the report suggests that any downturn in Australian property markets will be similar in magnitude to those that were seen between 2011 and 2012.

Sydney, Melbourne steam ahead

According to the report, the clear frontrunners in the capital appreciation stakes are Sydney and Melbourne, both of which are expected to reach double digit median house price rises in percentage terms. With solid population growth, reasonably positive economic conditions and an underlying dwelling deficiency underpinning this rise, the report notes that affordability is increasingly becoming a concern.

Affordability isn't so much of an issue in Australia's other capital cities, it adds. Outside of Sydney and Melbourne, local economic conditions have been more subdued or there has been an underlying excess of housing stock, contributing to weaker house price growth.

The economies of Western Australia and the Northern Territory, in particular, are weakening rapidly as mining investment is wound back, states the report, and this will cause house price growth percentages to reach flat or negative numbers in Perth and Darwin. Meanwhile, it predicts that the property markets in South Australia, Tasmania and the Australian Capital Territory are expected to remain relatively flat.

Rates to rise

While the report predicts that the slow change from a resource-driven to a domestic demand-driven economy will begin to have a positive effect on the economy and employment in late 2016, and that this will support house prices to some extent, this transition will be accompanied by a tightening in interest rate policy.

"Interest rates are expected to enter a tightening phase towards the end of 2016," said report author, and BIS Shrapnel Senior Manager, Angie Zigomanis. "After recent wage constraint, the Reserve Bank is expected to ‘fire a shot across the bow’ to curb wage expectations and alleviate potential inflationary pressures."

The report predicts that the cash rate will rise by 0.5 per cent, which will impact the increasingly unaffordable Sydney and Melbourne markets. Unaffordability in these two cities, it states, is already reaching the levels seen in the lead up to the recent interest rate peaks in 2008 and 2010/11.

With this predicted interest rate rise, as well as the possibility of further increases, also being expected to weaken housing markets outside of the country's two largest cities, Zigomanis has predicted that residential market conditions are forecast will weaken over 2016/17 and 2017/18.

Supply and demand

The impact of higher rates and a slowing economy will also be compounded by rising supply, he explained, and this changing supply and demand balance is ultimately expected to outweigh the support that low interest rates have provided to house prices in recent times.

He added that apartment construction has skyrocketed in the last couple of years, and this is expected to have an effect on the price outlook for units. "Most capital cities are building apartments at record rates, driven by investor demand. As these projects are progressively completed, strong tenant demand will be required to support rents and consequently values upon completion," he said.

But with the national population growth figure beginning to slow, this strong tenant demand may not eventuate. "Net overseas migration has fallen from a recent peak of 235,700 persons in 2012/13, to an estimated 184,000 persons in calendar 2014," said Zigomanis.

"With the majority of net overseas migration classified as ‘long term overseas visitors’, that is, temporary but not permanent arrivals, this reduction will impact most on the rental sector. Moreover, this slowdown in net overseas migration is most evident in the mining boom states of Western Australia, Queensland and Northern Territory."

He said that the detached house market, however, which is less reliant on tenant demand and more exposed to owner occupiers, should benefit from the effects of low interest rates for the remainder of 2015/16.

That said, he predicts that high levels of construction will see all states except New South Wales experience an oversupply of dwellings in the near future.

"With the price pressure of the stock deficiency of recent years being steadily alleviated, BIS Shrapnel expects all markets to weaken over 2016/17 and 2017/18, with house prices largely flat or in decline over this period," he said.