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The two key drivers of the long-term property boom may be drawing to a close, which may relieve the pressure off house prices over the longer term, according to an economist.
AMP Capital chief economist Dr Shane Oliver said that while there is still some time left before the property boom ends, he highlighted that interest rates “are at or close to the bottom”, with the Reserve Bank of Australia (RBA) now resorting to extreme measures to raise inflation.
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Dr Oliver said that this should ultimately result in higher interest rates.
Commenting further on what could end the property boom, Dr Oliver said: “Second, the chronic undersupply of property may be starting to fade thanks to the unit building boom since 2015, the hit to immigration and home building incentives, which are likely to keep home building high for the next 12 months.”
“Supply is likely to remain strong this year and next, but population growth has collapsed and could take years to recover. This may take some pressure off house prices on a three-to-five-year view.”
In the shorter term, however, Dr Oliver said that the average capital city home prices are expected to rise by 5 to 10 per cent in 2021 and 2022 spurred by record-low interest rates and economic recovery.
His projections have followed those by the Commonwealth Bank of Australia (CBA), which said that property prices could rise by over 14 per cent in the next two years.
Dr Oliver also said that as the economy begins to recover, this would offset the wind-down of government income support and loan repayment deferral measures implemented on the back of the economic impacts of the coronavirus pandemic.
Furthermore, he said while that first home buyer (FHB) incentives would likely be reduced, investor interest could accelerate and “fill the gap”.
However, Dr Oliver stressed that the outlook for the property market is “divergent”, adding that the drop in immigration amid border closures would likely constrain inner-city Sydney and Melbourne as well as unit demand.
On the other hand, outer suburban areas, houses, the smaller cities and regional property would all likely experience strong price gains, spurred by the “escape the city” trends and less exposure to immigration, he said.
“Expect average price gains of around 10 per cent in Adelaide, Brisbane, Perth, Hobart, Canberra and Darwin in addition to regional areas,” he said.
Dr Oliver said the divergence has also been evident in rising residential vacancy rates in Sydney and Melbourne, reflecting growing unit supply and the fall in immigration. But he pointed out that vacancy rates have been falling in other cities.
“This, in turn, points to upwards pressure on rents and property values in other cities relative to Sydney and Melbourne,” he said.
Commenting on the broader economy, Dr Oliver said that it is unlikely to justify rate rises until around 2023.
However, he flagged that a tightening in lending standards could be on the horizon in 2022 if the property market continues to ramp up as expected, causing financial stability concerns for the RBA.
He added that this should “start to slow things down and eventually the bottoming of the long-term interest rate cycle and the shift to oversupply may take pressure off prices, but that’s a while off yet”.
RBA governor Philip Lowe recently told the House of Representatives’ standing committee on economics that the RBA would continue to monitor lending standards instead of housing prices.
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