PROPERTY UPDATE - 25th June 2010 - SPECIALISED PROPERTY GROUP
Investors arrest slowdown
Price growth for residential properties may slow down in 2010, but investors will keep interest alive in the market, according to industry analyst and economic forecaster, BIS Shrapnel.
According to the company's Residential Property Prospects, 2010 to 2013 report, lending activity is already easing, with first-home buyer demand in the March quarter of 2010 down by 44 per cent on the same period last year and `upgrader' activity plateauing. This is flowing through to softer demand for residential property.
BIS Shrapnel senior project manager and study author, Angie Zigomanis, says a combination of factors have caused the momentum that built up in house prices in the second half of 2009 to stall in 2010.
"The strong price growth in the second half of 2009 was a rapid adjustment to housing variable interest rates that were at 40-year lows," says Zigomanis.
"With interest rates quickly lifting from these `emergency' levels, and the current variable rate of 7.4 per cent now being close to long term trends, the recent levels of price growth cannot be maintained."
BIS Shrapnel does not expect house prices to fall, however. Investors are beginning to return to the market and pick up some of the reduction in owner-occupier demand - loans to investors were up by an annual 26 per cent in the March quarter of this year.
While rental growth did slow in 2009, part of the slowing was due to first-home buyers moving from rental to owner-occupation, as well as the lower interest rates reducing the incentive for landlords to pass on further interest rate rises.
"Even though overseas migration inflows are steadily easing, a deficiency of stock is still in place with dwelling construction below underlying demand," says Zigomanis.
"This is expected to put pressure on vacancy rates and result in stronger rental growth later in 2010. The deficiency of dwellings, and improved rental picture, will continue to maintain investor demand and assist prices.
"In addition, the current round of interest rate rises is expected to have run its course, with further rises expected to be more moderate," adds Zigomanis.
"Our forecast is for the cash rate to increase by 50 basis points in 2010/11, and a further 50 basis points in 2011/12. The more stable interest rate environment is expected to underpin purchaser confidence as economic conditions continue to strengthen, and should continue to push through moderate house prices rises."
In effect, the surge in prices in the second half of 2009 in most cities has `front loaded' price growth in this upturn, leading to a flatter cycle in prices as the economic recovery continues. Higher interest rates will maintain price growth at a more moderate level, despite the acceleration in economic growth driven by the recovery in resources investment.
"Normally price growth is moderate at the beginning of the upturn and accelerates to a peak at the end of the cycle as economic growth also peaks," explains Zigomanis.
"However, the very low interest rates in 2009 initiated stronger rises, so the sharp 1.5 percentage point rise in the cash rate between October 2009 and May 2010 has already begun to strain affordability, causing future price growth to be more muted."
Among the state capitals, BIS Shrapnel forecasts those starting from the lowest price base will experience the most solid price growth. Real house prices in both Sydney and Perth are still below their previous peak levels, and this should underpin stronger growth relative to the other capitals. Price levels in Adelaide are below the other mainland capitals.
More moderate growth is expected in Brisbane, Hobart and Canberra due to weaker underlying demand and local economic conditions over the next three years, while the very strong price rises in Melbourne and Darwin have pushed affordability and will limit further rises.