Market Report: House Prices Set to Cool

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Tuesday, January 20th, 2015
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Conditions within the residential property market in Australia are generally expected to cool and house price growth is expected to ease in coming years amid the medium-term prospect of a period of interest rate tightening toward the end of the year and a reduction in the underlying deficiency of housing stock.

At the moment, momentum within the market remains extremely strong. Thanks largely to factors such as a period of expansive monetary policy, a shortage of stock following several years of low building activity, reasonably steady population growth and strengthening demand from ‘upgraders’ and investors, ABS data suggests median house prices across capital cities rose by 9.1 per cent in the 12 months to September last year. Sydney led the way with rises in excess of 17 per cent.

Going forward, however, many commentators expect growth to soften, with BIS expecting growth rates to slow across all major capitals except for Brisbane and NAB expecting capital value increases of a modest four per cent in the year to September 2015 and two per cent in the year to September 2016.

Several factors will contribute to this. While some commentators are suggesting monetary policy be eased further in the immediate term, most expect a modest tightening cycle to begin around the end of this year.

Generally subdued economic conditions and labour markets will impact household incom, which will in turn impact the willingness and capacity of those wishing to upgrade to do so. Generally rising vacancy rates in some cities may constrain rent increases and investor demand for rental property, albeit with vacancies only being above the three per cent the Real Estate Institute of Australia considers a ‘balanced’ market in four of the eight capitals.

Finally, high levels of construction activity are expected to eat into what the housing industry says is a general shortage of stock; in the three years to 2017, BIS expects the number of new commencements to outstrip growth in underlying demand in all states bar Queensland.

real estate price

Capital by Capital

According to BIS Shrapnel, in major capitals:

  • Price growth in Sydney will be reasonably strong over the next two years as the stock deficiency from a recent period of low building activity continues to work its way through the market but will ease toward 2016/17 as high volumes of new stock come onto the market.
  • While strong price gains in the city have been underpinned by continued healthy levels of migration, capital value appreciation in Melbourne will moderate amid continued weakness in the Victorian economy and pressure from persistently high levels of new construction activity.
  • Notwithstanding the negative impact of reduced resource sector work, Brisbane is expected to see healthy levels of house price growth as an anticipated recovery in interstate migration matches an expected increase in new dwelling construction and a deficiency in dwelling stock brought about by a period of low building activity in recent years remains in place.
  • Notwithstanding a number of headwinds, including the discontinuation of automotive manufacturing and a modest increase in new dwelling commencements which moved above underlying demand in 2013/14, Adelaide should experience modest levels of house price growth amid high levels of affordability and (for now) loose monetary policy settings.
  • In Perth, which saw massive gains in capital values during the mining boom, prices are expected to stagnate notwithstanding continued reasonable levels of investor and first home-buyer demand as the resource boom fades, net migration slows and a ramp up in construction activity erodes any dwelling deficiency which may have previously existed.
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