• 23/06/2024

Low interest rates to continue to underpin the residential markets – for now

www.bis.com.au – 23rd June, 2014

Angie Zigomanis & Cameron Wells


Low interest rates to continue to underpin the residential markets – for now

But rising dwelling supply and tightening in interest rates to bring about downturn

The momentum in price growth that emerged in 2013/14 is expected to continue to support prices in 2014/15 and to a lesser extent in 2015/16, according to leading property industry analyst and economic forecaster, BIS Shrapnel. However, rising construction and the potential for oversupply in many markets, together with an eventual tightening in interest rate policy, will impact on prices and potentially create conditions for price declines by 2016/17.

According to the company’s Residential Property Prospects, 2014 to 2017 report, tight markets and low interest rates have been the catalyst for the strength in the Sydney, Melbourne, Perth and Darwin markets over the past 12 months, as well as an emerging upturn in Brisbane. In the other capital cities, low interest rates have been helping to support stronger purchaser activity, if not stronger price growth.

BIS Shrapnel senior manager and study author, Mr Angie Zigomanis, says that although prices have been rising in a number of capital cities, affordability at current interest rates are sufficiently attractive to maintain further price growth for now. Rising construction pipelines have not yet worked their way through to completion and therefore supply, so pressures in most markets still remain.

“The current standard variable rate of 5.95 per cent is, outside of the GFC emergency low interest rates in 2009, the lowest level in over 40 years,” said Zigomanis. “As a result, affordability in most capital cities remains at early-2000s levels, which should be supportive of price growth.

“The low interest rates have had minimal impact on first home buyer demand, which has weakened considerably as state governments have removed incentives for established dwellings in favour of targeted incentives for new dwellings. However, this weakness has been more than compensated for by the strength of ‘next time buyers’ and investors. Population growth has also experienced a surge as net overseas migration increased from a low of 180,200 in 2010/11 to 244,400 in 2012/13, with the subsequent rise in rental demand also placing pressure on many capital city markets and helping to underpin price growth.”

These conditions are expected to continue to support prices over 2014/15 in light of relatively muted economic conditions as the economy transitions from being driven by resource investment to being driven by consumption and business and residential investment.

However, although price rises are expected to continue, the rate of rises will be varied across the capital cities in this time.

The strongest conditions are forecast for New South Wales and Queensland, where BIS Shrapnel estimates sizeable dwelling deficiencies are in place, as reflected by their low vacancy rates. In comparison, the rate of price growth in Melbourne is expected to slow in response to rising new supply and emerging affordability pressures, while rapidly weakening economies in Western Australia and the Northern Territory – as mining investment is wound back – will cause price growth to also slow in Perth and Darwin. With limited dwelling deficiencies, or oversupplies, the markets in South Australia, Tasmania and Australian Capital Territory are expected to remain relatively flat.

The change in gears from resource investment to domestic demand driving the economy will be slow, although it is forecast to eventually come through and begin to have a positive effect on the economy and employment later in 2015. To some extent, this will support house prices, although it will also signal the beginning of a tightening in interest rate policy.

“The Reserve Bank is expected to enter a tightening phase towards the end of 2015,” said Zigomanis. “Initial rises are likely to have a limited effect with the economy strengthening, although further rises will more significantly impact on affordability and prices through calendar 2016, while also eventually having the desired effect of slowing economic growth and inflationary pressures.”

Variable rates are forecast to peak at just over seven per cent by the end of 2016. While below previous peaks, it will nevertheless be sufficient to strain affordability, particularly in Sydney and Melbourne where recent price growth has been strong, with the impact of higher rates also compounded by rising supply.

The current rise in purchaser activity and prices is driving an increase in new dwelling construction. Nationally, BIS Shrapnel anticipates 184,400 new dwellings will be commenced in 2013/14 and 190,000 in 2014/15 – some 31 per cent higher than in 2011/12 – with multi-unit dwellings increasing by 43 per cent to a record of almost 80,000 dwellings in 2013/14. Total dwelling construction compares with an average underlying demand for 151,100 new dwellings per annum over the next five years. As these dwellings reach completion, the stock deficiencies in most states will begin to be eroded.

“As a result, BIS Shrapnel expects all markets to weaken by 2016/17 with the level of weakness depending on any dwelling deficiency still remaining and how far affordability is strained as interest rates peak,” said Zigomanis.

The strongest price growth over the next three years is forecast for the Brisbane market, where affordability has improved significantly after weak price performance in recent years, and low dwelling construction means there is a sizeable deficiency in place. The momentum in the Sydney market is also expected to continue for now as the market is estimated to still be in deficiency. However, as rising new dwelling supply works its way through to completion, pent up demand pressures will ease and the strains on affordability as interest rates rise will take their toll, leading to a forecast price decline by 2016/17.

Price growth in the Melbourne market is forecast to steadily slow from 2014/15 as large swathes of new apartment supply are completed. Similarly, the Perth and Darwin markets are also forecast to progressively weaken and prices may even eventually fall as resource sector investment continues to weaken, impacting local economic conditions.

An estimated excess supply is forecast to continue to dampen the markets of Adelaide, Canberra and Hobart, together with relatively limited local economic outlooks. However, low interest rates in the current market are expected to continue to support prices as vendors are able to hold on until they achieve their desired prices.

By June 2017, only the Brisbane and Sydney markets are expected to have experienced any growth in house prices in real terms over the previous three years, with all remaining capital cities expected to have recorded real price declines.

Outlook for price growth by region


Sydney’s estimated median house price of $795,000 in June 2014 represents a 15 per cent increase over 2013/14. The Sydney residential market has surged on the back of a sizeable undersupply of dwellings and the improved affordability resulting from low interest rates.

These factors are expected to continue to drive the Sydney market over 2014/15 and 2015/16, with total price growth of 14 per cent forecast over the two years. While affordability will become increasingly strained, healthy sentiment in the market and strong investor demand is expected to continue to underpin further price rises in this environment.

“Although new dwelling construction is rising, it takes some time for the high level of apartment projects to work their way through to completion and begin to impact on vacancy rates,” said Zigomanis. “Consequently, demand from investors is likely to continue to remain strong until new supply begins to come on stream in sufficient numbers to impact on the market.” Rising completions will also coincide with a forecast tightening in interest rate policy. The combination of

higher interest rates and price growth is expected to take affordability in Sydney to levels similar to that seen after the early-2000s boom. With much of the pent up demand pressures having largely dissipated by this time, prices in Sydney are forecast to decline by up to four per cent over 2016/17.

“Therefore, we are forecasting total price growth in Sydney over the three years to June 2017 to be 10 per cent, with all of the growth concentrated over the next two years, followed by a decline in the third year,” said Zigomanis.

Newcastle and Wollongong

Residential property prices in Newcastle and Wollongong usually benefit when Sydney experiences strong price growth, and migration into these regional centres increases. With affordability in Sydney’s outer suburbs still not overly strained at current interest rates, price growth in Newcastle and Wollongong is still forecast to be relatively moderate over 2014/15, before accelerating in 2015/16 as a combination of price rises in Sydney and the beginning of an expected tightening in interest rate policy begins to reduce affordability in the capital.

Without affordability becoming as strained as in Sydney, prices are forecast to hold firm in 2016/17 as interest rates peak. As a result, growth in the median house price is forecast to total 15 per cent in Newcastle and 14 per cent in Wollongong over the three years to June 2017, and more concentrated in the latter two years.


The Melbourne market has seen a healthy price rise over 2013/14. The strength in activity and price growth has largely occurred in the higher value inner and middle ring suburbs, which have in turn elevated the median house price, which is estimated to have risen by 16 per cent to $640,000 in the year to June 2014.

The Melbourne market has been underpinned by strong net overseas migration inflows, as well as unprecedented net interstate migration inflows, which were higher than the other states. This has allowed population growth to match the elevated level of new supply that has come online in the Melbourne market over recent years.

However, net overseas migration is now trending downwards, while new dwelling construction, particularly for apartments, continues to remain strong. BIS Shrapnel anticipates that apartment vacancy rates will increase over 2014/15 as the pipeline of projects work their way through to completion. Victoria is also facing headwinds in key sectors such as manufacturing and construction that will dampen economic conditions.

“The potential for continued solid growth in Melbourne’s median house price is limited given the potential for oversupply and weakness in the state economy,” said Zigomanis. “As a result, the rate of price growth is forecast to progressively slow over the next three years, particularly as interest rate policy begins to tighten.

“Median house price growth in Melbourne is forecast to total only eight per cent over the 2014 to 2017 period. After accounting for inflation, prices are actually forecast to fall by one per cent in real terms.”


Brisbane’s estimated median house price of $475,000 in June 2014 represents an eight per cent increase for the year.

From a fundamental perspective, things are improving in the Brisbane market. New dwelling construction has fallen below underlying demand in the Queensland market in recent years and an underlying deficiency of dwellings has emerged, with vacancy rates in Brisbane of 2.3 per cent in March quarter 2014. Brisbane’s median house price at June 2014 is seven per cent below its June 2010 peak in real terms, which together with the low interest rate environment has resulted in affordability being at early-2000s levels.

This is all beginning to have an impact on purchaser sentiment, with upgrader and investor demand increasing and encouraging price rises.

“The pieces are falling into place for the Brisbane residential market to continue to strengthen,” said Zigomanis. “However, the pace of price growth is likely to be moderate, with economic conditions still relatively subdued and net interstate migration inflows are at low levels.”

As a result, single digit price growth of seven to eight per cent per annum is forecast over 2014/15 and

2015/16 as purchaser activity continues to strengthen. A corresponding increase in new dwelling construction should also contribute to stronger economic conditions, particularly with a sizeable underlying dwelling deficiency expected to still be in place. A forecast peak in interest rates is expected to slow price growth by 2016/17, although price declines are not expected given the presence of an undersupply of dwellings.

A total rise of 17 per cent in the median house price is forecast over the three years to 2017, representing an average rise of 5.3 per cent per annum.

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. However, without the diversified economic drivers of Brisbane, these markets have underperformed in recent years.

Interstate migration into Queensland is at long term lows and this will continue to impact on demand in both the Gold Coast and Sunshine Coast, particularly with affordability relative to the eastern state capitals not as attractive as it was in the first half of last decade. However, an extended period of weak construction means that these markets are now moving into an undersupply and vacancy rates are tightening. This is also being reflected in median house price growth, which is expected to end at six per cent and five per cent over 2013/14 in the Gold Coast and Sunshine Coast respectively.

From an economic perspective large construction projects (Pacific Fair, the Commonwealth Games on the Gold Coast, and the Sunshine Coast University Hospital) are also expected to contribute to local employment, as is the beginning of a recovery in residential construction. Consequently, further price growth is expected, totalling 13 per cent in both markets over the three years to June 2017, although concentrated over 2014/15 and 2015/16.

Townsville and Cairns

The Townsville market has been weak over the last 12 to 18 months as the impact of falling resource sector investment has an impact on housing demand, causing vacancy rates to rise and prices to ease. In contrast, the downturn in the Cairns market since the Global Financial Crisis has now stabilised, as the resulting collapse in construction has now resulted in a dwelling deficiency emerging.

The Townsville market is forecast to remain relatively weak over 2014/15 before vacancy rates tighten as a result of weak dwelling construction, driving stronger growth from the following year. The pick up in Cairns is expected sooner, with the upturns in both markets being sustained by low interest rates. Local economic conditions in both markets are expected to strengthen on the back of rising residential construction (from a relatively low base) and improved tourism growth contributing to employment.

By 2016, the Townsville market is expected to have caught up with Cairns, with both markets then being dampened by tightening interest rate policy as interest rates reach a forecast peak by the end of 2016. Cumulative price growth over the three years to 2017 is expected to be 11 per cent for both Townsville and Cairns. Sharp rises in insurance costs after recent cyclones in Queensland’s north will impact on the financial equation for investors and may have a dampening effect on investor demand until further rental growth comes through to compensate.


Adelaide’s estimated median house price of $415,000 at June 2014 represents a four per cent increase from June 2013.

“The dwelling excess in the South Australian market after the post-GFC surge in construction began to be absorbed over 2012/13 and 2013/14, resulting in some improvement to prices,” said Zigomanis. “However, the state is now experiencing another round of rising construction in response to large and temporary increases in incentives to first home buyers of new dwellings.

“The rise in construction will coincide with slowing underlying demand as net overseas migration inflows ease, causing the excess dwelling supply to increase and vacancy rates to rise. With the state continuing to face economic headwinds, there will be little to place upward pressure on prices apart from low interest rates.” As a result, the residential market in Adelaide should remain challenging, with the median house price

forecast to show only limited growth totalling five per cent over the three years to 2017, which represents a four per cent decline in real terms.


The Perth market experienced a surge in demand over calendar 2013. This was driven by healthy local economic conditions, a rising dwelling deficiency, low vacancy rates, strong rental growth and improved affordability resulting from low interest rates. The city’s median house price rose by eight per cent over the course of the year.

In contrast to the other states, first home buyer demand in Western Australia remained strong, with there being only limited changes being made to the incentives, and first home buyers of established dwellings still eligible for a grant. This has added to both the rising upgrader and investor demand.

“However, there is evidence that the Perth market has begun to slow in the first half of 2014. BIS Shrapnel estimates that resource sector investment in Western Australia has peaked and is declining,” said Zigomanis. “This has had an impact on net overseas and interstate migration, which are both now easing.

“Consequently, vacancy rates are rising and rental growth has stalled. Price rises have also slowed, with Perth’s estimated median house price of $550,000 at June 2014, resulting in annual growth of five per cent.

“Price growth should be modestly positive in 2014/15, but activity in the Perth market is forecast to continue to progressively slow as resource sector investment winds down, impacting employment and income growth. Tightening interest rate policy as the national economy strengthens will further dampen demand, with price falls expected by 2016/17 when mining investment is close to bottoming out.”

BIS Shrapnel is forecasting Perth’s median house price to be only three per cent higher by June 2017 compared to June 2014 levels, representing a decline in real terms of six per cent.


The Hobart residential market has been hit by a period of overbuilding that has coincided with demand for new dwellings weakening, as net interstate migration experienced a net outflow of 2,300 persons per annum on average over 2011/12 and 2012/13. Relatively low sales volumes has meant that changes in the median price have been patchy from quarter to quarter, and although the expected median house price of $375,000 at June 2014 is seven per cent higher than June 2013, this was in turn six per cent lower than the previous year.

Net interstate migration outflows have increased due to the weak employment environment in Tasmania. However, these are expected to begin to be offset by increased “tree change” migrants from the mainland (mainly New South Wales and Victoria) who are expected to increasingly take advantage of recent price gains to sell their homes to downshift to Tasmania. Construction in the state is also experiencing an uplift in 2013/14 in response to an increase in grants to first home buyers of new dwellings to $30,000.

“The rise in construction and limited population growth means that the current excess supply is likely to persist over the next three years,” said Zigomanis. “However, prices are expected to remain relatively stable, firstly due to low interest rates and subsequently as demand from interstate migration begins to improve.”

As a result, Hobart’s growth in median house price is forecast to be limited to a total of four per cent over the next three years, reflecting a decline of five per cent in real terms.


Canberra’s median house price is estimated to have been flat over 2013/14, being $510,000 at June 2014. New dwelling activity in Canberra has been particularly strong in recent years, with apartment development being sustained at record levels. BIS Shrapnel estimates that there is an underlying oversupply in the Canberra market, and this is reflected in vacancy rates above the balanced market rate of three per cent.

“Purchaser demand is also likely to be curtailed in this high supply environment,” said Zigomanis. “Cuts to federal government departments will impact on employment and population growth in the Capital, with interstate migration already recording a net outflow in 2012/13 – after recording net inflows in previous years. “In this environment, Canberra’s oversupply is likely to be sustained for some time and this will impact

prices. Nevertheless, Canberra has the highest average income of the capital cities and affordability is not as strained as in the other cities, which should therefore also prevent any major price declines. Therefore, the median house price is forecast to be more or less flat over the three years to June 2017 – a total rise of three per cent – which reflects a decline of six per cent in real terms.”


Median house price growth in Darwin surged by 18 per cent over 2011/12 and 2012/13, underpinned by a substantial increase in resource sector investment led by the Icthys LNG project. While the project is still well underway, price growth has slowed in 2013/14, with BIS Shrapnel’s median house price estimate of $625,000 at June 2014 representing a two per cent rise for the year.

“Strains to affordability appear to be showing up, with the rate of growth in lending for owner occupation and to investors slowing over the year,” said Zigomanis. “First home buyer demand has also fallen substantially despite increases to first home owner’s grants since December 2012.

“This suggests that there is unlikely to be significant upside to prices as resource sector investment remains strong, with the potential for downside later on as the investment phase of the Icthys project winds down. As a result, total growth in the median house price of only three per cent is forecast in the three years to June 2017, which will result in a real house price decline of five per cent over the period.”

About BIS Shrapnel

BIS Shrapnel is Australia’s leading provider of industry research, analysis and forecasting services. BIS Shrapnel helps clients better understand the markets in which they operate, through reliable and detailed market data, analysis of developments and drivers and thoroughly researched forecasts.

BIS Shrapnel compiles accurate, clearly explained and detailed information on industry sectors, markets and industries in which their clients operate. BIS Shrapnel provides market size and segmentation data, market shares, consumer attitudes and supplier reputation information, and regularly conducts both business-to-business and consumer research.

Over the company’s 50-year history, BIS Shrapnel has built up a strong level of expertise and unique methodologies for forecasting.


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