Date: Monday 15th June 2009
With house prices tipped to rise by as much as 22 per cent during the next three years, economic forecasters BIS Shrapnel say affordable suburbs will lead the way back to an eastern states real estate recovery.
BIS Shrapnel’s Residential Property Prospects, 2009 to 2012 report says conditions are ripe for a sustained recovery in residential property prices.
“Low interest rates, solid growth in rents and housing shortages are evident in most markets – (but) confidence will only recover slowly during 2009/10,” says report author Angie Zigomanis.
Zigomanis says the surge in first-home buyer demand, underpinned by the Federal Government’s First Home Owner Boost Scheme and low interest rates stage, means real estate action is occurring at the lower priced end of the market.
But he says a recovery in property demand beyond first-home buyers is already developing. The total value of housing loans is up 14 per cent over the first four months of 2009.
By the end of 2009, strong turnover of the most affordable properties will be flowing through into the bulk of households positioned towards the middle of the market, as people who have sold their existing dwellings to first-home buyers upgrade to their next home.
Prices are forecast to only gradually pick up in 2009/10. Once unemployment has peaked at the start of 2010/11, price growth is forecast to strengthen from that point on. A return to double-digit growth in market-wide price measures is projected for 2011/12.
Among the state capitals, BIS Shrapnel forecasts Sydney, Melbourne, and Adelaide will show the strongest price growth through to 2012. Housing affordability in Sydney and Melbourne is now at its best level for around a decade, while price levels in Adelaide are below the other mainland capitals.
More moderate growth is expected in Brisbane, Hobart, and Canberra, while price growth in Perth and Darwin is expected to be weak, as the local economies of these cities are impacted by a decline in investment spending in the resources sector.
Outlook for price growth by region
Sydney’s median house price is forecast to be $530,000 in June 2009. This is four per cent lower than in June 2004, and 17 per cent lower in real terms. Combined with interest rates, which are now at 40 year lows, affordability in Sydney is at its best level for a decade.
New dwelling construction in Sydney has also been at 50 year lows, which has been evident in the low vacancy rates and strong rises in rents in recent years. New dwelling construction will be slow to recover to the levels required to meet underlying demand, which means the upward pressure on rents will remain.
“This deficiency will eventually encourage investors back into the Sydney market,” says Zigomanis. “However, any improvement in demand will not gain traction until economic growth starts to pick up from 2010/11.
“We are forecasting total price growth in Sydney over the three years to June 2012 to be 19 per cent, with the strongest growth coming through at the end of the period.”
Newcastle and Wollongong
Price levels in Newcastle and Wollongong are significantly lower than across Sydney. In the short term, these markets are benefiting from the current first-home buyer incentives. However, as the deficiency of dwellings in the Sydney market increases, these markets will also benefit from the inward migration of residents from the state capital. Total growth in the median house price in Newcastle over the three years to June 2012 is forecast to reach 22 per cent, while the total rise for Wollongong is forecast to be 20 per cent.
Melbourne’s median house price experienced a decline of 10 per cent during calendar year 2008, after total growth of 27 per cent in the 18 months to December 2007. The median price then fell by a further three per cent in the March quarter of 2009.
However, increased purchaser activity in the Melbourne market, due to a pick up in upgrader activity, is expected to result in Melbourne’s median house price reaching a forecast $425,000 in June 2009. This will still be a net price fall of six per cent for the financial year.
“The weak economic environment will continue to be a dampening factor on price growth in the Melbourne market during 2009/10,” says Zigomanis. “A rising deficiency of dwellings will maintain upward pressure on rents, while the reductions in interest rates have boosted affordability in Melbourne to its best level since 1999.
“This is likely to encourage demand as economic growth begins to strengthen through 2010. Over the 2009 to 2012 period, we are forecasting Melbourne’s median house price will rise by a total of 19 per cent, which is nine per cent growth in real terms.”
House price growth in Brisbane was healthy through to the end of 2007, rising by 26 per cent over the previous 18 month period. Demand was buoyed by strong population growth and outperforming economic growth due to booming resource investment.
However, rising interest rates through 2007/08 significantly curtailed affordability and weakened demand, with the median house price falling by three per cent over calendar year 2008. Together with the downturn in the economy, this trend is expected to have continued, with the forecast median price of $391,000 in June 2009 representing a total decline of seven per cent for the financial year.
Nevertheless, Zigomanis believes that with both net overseas and net interstate migration inflows, healthy underlying demand, an increasing deficiency of dwellings, and a more conducive interest rate environment, modest price growth will return in 2009/10.
“We then expect prices to pick up more strongly from 2010/11, as economic growth gathers momentum nationally,” says Zigomanis. “Over the three-year period to 2012, the median house price is forecast to rise by a total of 16 per cent, or six per cent in real terms.”
Gold Coast and Sunshine Coast
House prices on the Gold Coast and Sunshine Coast have generally moved in tandem with Brisbane, benefiting from the same drivers of population growth as the capital, that is, primarily net interstate migration inflows and, to a lesser extent, overseas migration.
On the Gold Coast, BIS Shrapnel forecasts prices will increase by 14 per cent over the three years to June 2011, with a similar rise of 14 per cent anticipated for the Sunshine Coast. Price growth in these centres will slightly lag behind Brisbane, as it will be later in the upturn when residents will be more confident in selling their existing dwellings to move to these regions.
Townsville and Cairns
The upturn in price growth in Townsville and Cairns to 2007 was underpinned by booming investment in the resource sector, which underpinned employment and population growth, as well as income growth. New dwelling construction has weakened considerably in both centres, and median prices also declined by four per cent in Townsville and eight per cent in Cairns during calendar year 2008.
Consequently, with resource investment nationally not expected to show any recovery through the forecast period, price growth in the northern Queensland centres is forecast to be below that of South East Queensland, particularly after the region’s affordability advantage has been eroded over recent years.
Cumulative price growth over the three years to 2012 is expected to be 13 per cent for Townsville and 14 per cent for Cairns.
Adelaide’s median house price began to weaken in the second half of 2008, after rising by 28 per cent in the 18 months to December 2007, and recording a modest rise in the months to June 2008. Following this trend, BIS Shrapnel’s forecast median house price of $360,000 in June 2009 represents a three per cent decline during 2008/09.
“This decline is smaller than the other state capitals, and reflects that Adelaide has the lowest median house price of the mainland state capitals,” says Zigomanis. “This also means that incentives such as the First Home Owners Grant Boost Scheme are having the greatest financial impact in Adelaide.”
Nevertheless, price growth will remain subdued in the short term as a result of the weakened economic environment. Price growth is then expected to accelerate from 2010/11, with growth in the Adelaide median house price forecast to rise by 19 per cent over the three years to June 2012, which is an increase of nine per cent in real terms.
The Perth residential property market began to slow in 2007, well ahead of the eastern state capitals. The median house price nearly tripled over the previous five years to 2006. This massive growth was supported by a rise in underlying demand and booming economic conditions, led by strong investment in the resources sector.
Although growth in the median house price stalled in calendar year 2007, as affordability concerns initially emerged, it subsequently fell 12 per cent over calendar year 2008, as interest rate rises, followed by the downturn in the economy, began to hit home.
“With the substantial interest rate cuts over the past months affordability has improved significantly and the decline in prices is beginning to stabilise,” says Zigomanis. “The forecast median house price of $425,000 in June 2009 represents only a four per cent decline for the year.
“Although price growth is forecast to become positive in 2009/10, and pick up in subsequent years, demand will be dampened by a downturn in resources investment, which has been a key driver of economic growth in Western Australia.”
As a result, BIS Shrapnel forecasts Perth house prices to rise by 12 per cent over the three years to June 2012, representing a minimal rise of two per cent in real terms.
After a healthy 19 per cent increase over the 18 months to December 2007, Hobart’s median house price declined marginally by three per cent over the following 12 months to December 2008. Rising interest rates and a subsequent slowing of the economy dampened demand, although as economic growth is slowing nationally, Tasmania has experienced an increased inflow of migration from other states.
“This trend may be attributed to the ‘tree change’ as residents on the mainland considering retirement sell their homes to downshift to Tasmania,” says Zigomanis.
BIS Shrapnel forecasts Hobart’s median house price will reach $335,000 in June 2009. However, demand will become more subdued as the net interstate migration moves back to its long term net outflow. As a result, Hobart’s median house price is forecast to rise by 15 per cent over the 2009 to 2012 period, reflecting an increase of five per cent in real terms.
Median house prices in Canberra increased by 25 per cent in the 18 months to December 2007, boosted by increased interstate migration generated by continued strong growth in Federal Government employment and wages.
However, the combination of sharp rises in interest rates over 2007/08, and possibly greater uncertainty in public sector employment associated with a change of Government, saw the median house price fall by nine per cent in calendar year 2008. Coupled with the downturn in the economy, Canberra’s median house price is forecast to fall six per cent in 2008/09, to a median of $440,000 in June 2009.
“On the other hand, the decline in house prices, together with falls in interest rates in 2008/09, have improved affordability in Canberra significantly,” says Zigomanis. “While in the short term, Federal Government employment is expected to remain stable due to efforts to prevent job losses, employment growth may be slower in the medium term, as the Government attempts to keep spending in check to bring the budget back into surplus.”
As a result, prices are forecast to increase by a total of 17 per cent over the three years to June 2012, which reflects a rise of seven per cent in real terms.
Darwin was the only capital city to record a rise in its median house price over calendar year 2008, with the median price in December 2008 being $432,000. This represents a rise of five per cent for the year. Darwin has also seen a further increase of seven per cent in the March quarter of 2009.
The Northern Territory economy has a high reliance on the oil and gas sector, which has not weakened to the same extent as other commodities in the last year. It also relies on defence and government administration. As a result, the local economy is likely not to have weakened as much as the national economy in the last year.
Nevertheless, BIS Shrapnel expects price growth to slow over the forecast period as major projects in the oil and gas sector are completed. Darwin’s forecast median house price of $470,000 in June 2009 reflects a rise of 11 per cent for the year. However, this will be the last hurrah for prices in Darwin in the short term, as a gap in resource investment projects impacts the local economy. Subsequently, Darwin’s median house price is forecast to show a total increase of 11 per cent over the three years to June 2012, or a one per cent increase in real terms.