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BIS Shrapnel forecasts a two tiered residential property market

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The new BIS Shrapnel report on the residential property market indicates improvements in New South Wales and the resource state capitals with the other capitals expected to remain weak.
Leading property industry analyst and economic forecasting specialist, BIS Shrapnel says that the fundamentals are beginning to favour an improvement in residential market conditions after two years of price declines in 2010 and 2011. The improvement will not be uniform across the states, with New South Wales and the resource states of Western Australia, Queensland and Northern Territory beginning to show signs of recovery, while conditions in the remaining non-resource states will continue to be dampened by underperforming economies and excess supply.
According to BIS Shrapnel’s Residential Property Prospects, 2012 to 2015 report, there is a substantial dwelling deficiency already in place in New South Wales as well as in the resource states. Moreover, cuts to interest rates have seen affordability in their capital cities improve to their best levels since the first half of last decade.
BIS Shrapnel senior manager and study author, Mr Angie Zigomanis says that purchasers in the main centres of these states will keep away through to the end of 2012 due to concerns about the direction of the global and local economy as well as their employment prospects, despite evidence of a pickup in key market indicators such as vacancy rates and rental growth.
The recovery is expected to eventually gain traction through 2013 as continued growth in resource investment spending eventually flows through to other sectors of the economy. Zigomanis forecasts that purchasers will enter the market in greater numbers with the local economic and employment outlook becoming more positive in addition to some stabilisation and improvement overseas, which will translate to greater sales volumes and a pickup in price growth over 2013/14 and into 2014/15.
In contrast, conditions in the other non-resource states (Victoria, South Australia, Tasmania and Australian Capital Territory) will continue to be tough as the strong bounce in residential construction after the Global Financial Crisis has resulted in an erosion of their dwelling deficiency along with an emerging excess of dwelling stock.
Zigomanis points out that these states are also underperforming economically due to a fall-off in construction and a negative impact to industry from the high Australian dollar. The improvement in affordability from lower interest rates may stabilise house prices in this environment. However, without any supply pressures, median house prices in Melbourne, Adelaide, Hobart and Canberra are forecast to show little change and decline in real terms over the next three years.

Key factors for the fall in prices over 2010 and 2011:
  • First home buyer demand halved, after demand had been largely pulled forward into 2009 to take advantage of generous Federal and State Government incentives
  • Variable interest rates increased by two percentage points between October 2009 and November 2010, which together with the rebound in price growth over 2009/10 resulted in a deterioration of affordability
  • Economic growth waned after Federal Government stimulus spending wound down, with insufficient new private sector investment coming through to pick up the slack
  • Population growth, and consequently underlying demand for dwellings slowed as net overseas migration inflows fell after 2008/09 in line with weaker economic conditions, which in turn contributed to the dwelling balance in a number of states moving into oversupply
Many of these negatives are already beginning to turn around with first home buyer demand showing signs of improvement back to normal levels since the end of 2011; loans to first home buyers in the nine months to March 2012 are up by 24% in Queensland and 25% in Western Australia over the same period last year.
The 100 basis point reduction in variable interest rates in 2011/12, together with house price declines has seen affordability improve substantially. Overseas migration has been showing a strong recovery over 2011/12, while the latest GDP data suggests a more positive economic result.
However, Zigomanis observes that despite these improving signs, any upturn in the residential market is being stymied by pessimism in relation to the outlook for the economy and employment prospects.
While overseas economic conditions are expected to remain challenging, improving local economic conditions should move to the forefront of people’s minds and begin to have a more substantial impact on purchaser sentiment. At the same time, the increased investment and spending in the mining and related sectors of the economy should increasingly flow through to the domestically focussed non-mining sectors of the economy, leading to stronger employment growth.
According to Zigomanis, the increased confidence is forecast to encourage more first home buyers into the market and existing occupiers to upgrade. Investors should also increasingly enter the market once there is evidence that prices have bottomed out, and that they will also be supported by solid rental growth.
BIS Shrapnel forecasts that this recovery will not be uniform with conditions over the next three years to be the strongest in the two markets that have been weakest in recent times, Perth and Brisbane. While vacancy rates of above 3% in these markets in 2010/11 suggest excess supply, low new dwelling construction and acceleration in migration have seen vacancy rates quickly turn around as they have moved into an expanding deficiency.
Price falls over 2010/11 and 2011/12, together with recent interest rate reductions have also seen affordability improve significantly. Though rising income growth will support the recovery in prices, it will be moderate averaging around 6-7% per annum over the next three years.
Conditions are also expected to be conducive for a more modest 5% per annum improvement in prices in Sydney and Darwin over the next three years. Improving domestic economic conditions should see prices stabilise in Melbourne, Adelaide, Hobart and Canberra in the next 12 months.
Moving out towards the end of the next three-year period, all markets are forecast to be impacted by rising interest rates. The strengthening economic environment will be reflected in the unemployment rate falling closer to 4% than 5%, and emerging inflationary pressures by the end of 2013 are expected to result in a tightening in interest rate policy.

The complete report is available on the BIS Shrapnel website.

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