Australia | Jun 29 2015
– Prices to peak over the next two years
– Apartments to reach oversupply
– RBA rate rise in late 2016
– Declines seen from 2017
By Greg Peel
The ongoing rise in Australia’s median house price is being driven by record low interest rates and a lag in housing supply. The bulk of the average is nevertheless being driven by Sydney, and to a lesser extent, Melbourne, both of which are expected to have posted double digit percentage average gains in 2014-15.
Sydney and Melbourne have experienced solid population growth, notes BIS Shrapnel’s latest property report, Residential Property Prospects 2015 to 2018, alongside improving economic conditions and a lack of dwelling supply. Affordability in these cities has now reached a level of concern. Other capital cities are not experiencing such an affordability strain, given weaker house price growth due to more subdued economic conditions and excess dwelling supply.
Low interest rates will continue to support house prices, BIS Shrapnel suggests, but shifts in the housing demand/supply balance across the states will impact on prices in coming years. A boom in the construction of apartment blocks is creating a disconnect in the supply balance between detached houses and units and as such, a divergent price path is emerging.
Most capital cities are building apartment blocks at record rates, driven by investor demand. As projects are progressively completed, strong tenancy will be required to support rents and thus implicit unit value, BIS Shrapnel warns. At the same time, national population growth is beginning to slow, falling from a peak of 235,700 in 2012-13 to a forecast 184,000 in calendar 2014. The slowdown in net migration is most evident in the mining states of Western Australia, Queensland and the Northern Territory.
The detached house market is less reliant on tenant demand and more exposed to owner-occupiers. Here low interest rates are expected to continue to support house prices in most capital cities in 2015-16. BIS Shrapnel expects house supply in New South Wales, Queensland and Victoria to be in overall deficiency as of June 2015. The affordability strain in Sydney and Melbourne should nevertheless affect an easing to single digit percentage price growth over 2015-16. Brisbane has been experiencing weaker price growth recently, but further interest rate cuts this year should see house price growth supported.
Rapidly weakening economic conditions in WA and NT, as mining investment winds down, will lead to flat prices in Perth and Darwin. Â South Australia, Tasmania and the ACT are all estimated to be in oversupply and thus will also see flat prices.
While the Australian economic transition away from mining to improved domestic demand is a slow one, BIS Shrapnel expects positive signs to be apparent by late in 2016, resulting in improving employment. While a stronger economy would usually suggest higher house prices, it will also signal the beginning of the RBA’s interest rate tightening cycle. The central bank is expected to “fire a shot across the bow” at the first sign of economic improvement in order to stave off potential inflationary pressures.
The first rate rise, and fear of more to come, will impact on Sydney and Melbourne house prices. The undersupply element in these cities stands out given affordability has fallen to levels last seen at peaks in the RBA’s interest rate cycle. But the current apartment construction boom means supply will be rising just as the RBA is looking to slow economic growth.
As dwellings under construction reach completion over the next three years, all states with the exception of NSW will either move into oversupply or see oversupply increased, BIS Shrapnel warns. As price pressure is alleviated, house prices are expected to remain flat or decline over 2016-17 and 2017-18. Sydney prices should remain supported until 2016-17 while Melbourne prices should begin to decline in 2015-16. Economic conditions will foster further declines in Perth and Darwin, while oversupply will foster further declines in Adelaide, Hobart and Canberra.
The exception is Brisbane, which has already suffered price declines against the trend of the rest of the country. Affordability has improved as a result thus combined with low interest rates, should lead to price support.
The aforementioned disconnect between detached houses and units means the bulk of price declines will be felt in the unit market. Detached house construction has lagged apartment block construction, which has been driven by investor demand. Thus BIS Shrapnel suggests house supply will remain in deficit or a slight surplus while units suffer from oversupply. While interest rates might rise, they will remain historically low, thus mortgage holders should not feel too much of a strain.
By June 2018, BIS Shrapnel expects only Brisbane to be experiencing any house price growth in real terms. Remaining capital cities are forecast to see median declines of up to an average 10%. Unit prices are expected to decline 4-12% across the capital cities over the next three years. Â
Given foreign investors are only permitted to purchase new apartments, the resale market will be confined to only domestic buyers.
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