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House prices in Australian capital cities are poised to rise further, driven by a worsening housing shortage and increasing population growth, according to a non-bank lender.
Research conducted by Performance Property for non-bank lender Capspace has indicated that building approvals are failing to keep pace with demand in major cities, which is likely to result in higher property prices and rents over the next two years.
Tim Keith, managing director of Capspace, said that the current high construction costs and limited activity in the building sector will likely keep the apartment and housing markets undersupplied.
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“Building approvals are simply not keeping up with population increases. The probability of valuation increases in the residential unit sector in Melbourne, Sydney, and Brisbane are high over the next 24 months,” Keith said.
Despite strong rental growth across most capital cities, Keith said that the national vacancy rate remains low at around 2 per cent.
However, he said that rental growth appears to be slowing in regional areas, which might offer some relief to renters.
“Strong rental growth is still evident across the country for the residential housing and apartment sectors across most capital cities. There is, however, evidence of rental growth starting to slow down in regional locations,” he said.
The growing accommodation shortage is expected to put additional pressure on rental markets nationwide.
Keith said that net interstate migration to Queensland and Western Australia could make these capital cities attractive for investors seeking diversification.
“Evidence of further increases to net interstate migration for Queensland and Western Australia are positive and that could also make an argument for investors to get more exposure to these capital cities for further diversification,” Keith said.
Capspace, which uses property as security for its loans, emphasised the importance of understanding the property market. While rising property values have benefited property owners, Keith advised investors to consider diversifying their portfolios into other asset classes.
“Australians have stockpiled their wealth in property; around two-thirds of household wealth is now held in residential property, a proportion that has increased over time with rising property values,” he said.
“That makes many Australians vulnerable to a correction in the property market over the longer term, especially if rates rise again, and the economy slows.”
Recent data from the Australian Bureau of Statistics (ABS) revealed that household net wealth reached a record $16.2 trillion in the March 2024 quarter, with residential property accounting for about 67.9 per cent of this wealth. In contrast, households held $1.46 trillion in equities and $1.73 trillion in cash and deposits.
Keith said that Australians should consider allocating more of their wealth to fixed-income assets like private credit, which can offer more attractive yields.
“Private credit can deliver investors yields close to 10 per cent per annum and investors understand their capital has protection based on the stringent loan process, lending and compliance policies, along with the security taken over borrower assets,” he said.
[RELATED: House and land prices bolstering household wealth: ABS]
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