In a much-needed piece of positive news for residential property development and construction firms, house prices in both New South Wales and the three key resource states are set to return to solid growth, a key industry forecaster says.
Prices in Victoria, South Australia, Tasmania and the ACT, however, are likely to remain subdued.
In its latest Residential Property Prospects 2012/2025 report, economic forecasting firm BIS Shrapnel says that after two years of decline, fundamentals throughout Australia are beginning to favour an improvement in residential market conditions.
BIS says that a number of the negative factors responsible for house price falls in the past two years – a halving in first-time home buyer demand, increases in interest rates between October, 2009 and November, 2010, waning economic growth and slowing population growth – are beginning to turn around.
Following the pull-forward effect, in which first-time home buyers brought forward purchases in 2009 to take advantage of the homeowner grant boost resulting in a subsequent slump in following years, first-time home buyer demand is now returning to normal levels, says BIS Shrapnel senior manager and study author Angie Zigomanis.
Moreover, Zigomanis says, the combination of house price declines and the 100 basis point reduction in variable interest rates over the past financial year have resulted in a substantial lift in affordability. Meanwhile, overseas migration is picking up again and the latest GDP data suggests an improving economy.
“While overseas economic conditions are expected to remain challenging, improving local economic conditions should move to the forefront of people’s minds and begin to have a more substantial impact on purchaser sentiment,” Zigomanis says.
“At the same time, the increased investment and spending in the mining and related sectors of the economy should increasingly flow through to the domestically focussed non-mining sectors of the economy, leading to stronger employment growth. The increased confidence is forecast to encourage more first home buyers into the market and existing occupiers to upgrade. Investors should also increasingly enter the market once there is evidence that prices have bottomed out, and will also be supported by solid rental growth.”
BIS expects New South Wales, along with the mining states, to derive the lion’s share of this growth.
In Perth and Brisbane, given a combination of improved housing affordability, strong economic and income growth and low levels of construction, BIS expects prices to rise by six to seven per cent over the next three years.
In Sydney and Darwin, too, the forecaster expects conditions to be conducive to price growth of around five per cent over that period.
By contrast, however, barely any growth is expected in Melbourne, Adelaide, Hobart and Canberra.
“Economically, these states are also underperforming due to a falloff in construction and a negative impact to industry from the high Australian dollar,” Zigomanis says. “The improvement in affordability from lower interest rates may stabilise house prices in this environment. However, without any supply pressures, median house prices in Melbourne, Adelaide, Hobart and Canberra are forecast to show little change and decline in real terms over the next three years.”