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While it is fair to say the Australian property market is currently wading its way through a soft period, as with other cycles, recovery is never too far away
AFTER STALLING in 2010/2011, residential price growth is expected to regain momentum in 2011/2012. Price growth slowed in 2010 as a result of weaker first home buyer demand, rising interest rates and slowing migration and population growth.
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However, population growth is set to recover from 2011/2012 as the economy strengthens, causing the underlying dwelling deficiency to increase in most markets and place renewed pressure on rental markets.
First home buyer numbers are set to enter a recovery phase with flow-on effects to upgrade demand. However, the key to demand will be the pace and magnitude of interest rate rises which could serve to dampen purchaser confidence if there is an aggressive round of rate increases.
However, our forecast for only modest initial rate rises should see purchaser demand improve through 2011/2012 although it will be curtailed by tightening interest rate policies over 2013.
Despite concerns about residential property being overvalued, we expect that prices can be supported in the economic environment forecasted.
Those markets that continue to experience strong underlying demand and better levels of affordability will show stronger price growth, while those with weaker underlying demand and emerging affordability issues will experience more limited growth.
Sydney’s median house price remains below its previous peak in real terms and with the upward pressures of a substantial stock deficiency, this should facilitate further rises in prices despite a rising interest rate environment.
Conditions for a significant correction / decline in Australian capital city house prices are just not there.
In ‘the recession we had to have’ in 1989-1991, when mortgage rates were 17 per cent and unemployment nationally sat at 11.5 per cent, house price decline averaged 10 per cent.
From the Reserve Bank’s perspective, all medium term concerns are favourable towards the economy – that is the positive impact of the resources boom, capital investment, growth in GDP, employment, wages and the CPI, with a possible flow-on impact for interest rates.
These conditions, together with continuing significant constraints on housing supply and an expected recovery in our immigration intake, which will add to demand pressures, are not the conditions that will lead to a collapse of property prices.
Property price growth in most capital city markets is unlikely to be more than inflation. In some markets, in real terms we could see declines in line with what we saw in Sydney in 2005-2007.
By Ian Graham, chief executive officer, QBE LMI
