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Australian residential property market still a mixed bag: BIS Shrapnel

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Growth in residential property prices is forecast to vary region-by-region in 2007/08, with Brisbane, Melbourne, Adelaide and Canberra expected to show a modest pick-up in growth, according to a leading industry analyst and economic forecaster, BIS Shrapnel.

At the other end of the spectrum, price growth in the Perth and Darwin markets will begin to pull back as affordability has become a serious issue.

Despite the deterioration of affordability across the board after three 0.25 percentage point interest rate rises in calendar 2006, low unemployment and strong wages growth have meant that any serious shake out in prices has not occurred, according to BIS Shrapnel’s Residential Property Prospects, 2007 to 2010 report.

The report highlights a strong growth over the three years to 2010 is likely to occur in Brisbane, underpinned by strong underlying demand, more attractive affordability compared to the other eastern state capitals, strong economic conditions, low vacancy rates and solid rental growth.

Moderate price growth is expected to continue in Melbourne, Adelaide and Canberra where prices are forecast to move roughly in line with wages growth, while the upturn will be delayed in Sydney as high prices continue to impact on affordability.

House price growth will be modest in Hobart, while Perth and Darwin will be affected by an easing of the resources boom exacerbating the recent deterioration of affordability, according to BIS Shrapnel.

“Economic growth has continued to be solid in 2006/07, with jobs growth remaining very strong,” said BIS Shrapnel senior project manager and report author, Mr Angie Zigomanis.

“High growth in employment is improving household confidence towards investment in residential property. At the same time, demand for housing is being boosted by high overseas migration, so demand for rental properties is rising strongly. Subsequent growth in rentals and improvement in yields will begin to drive some growth in investor demand.”

However, BIS Shrapnel forecasts the contribution of business investment will begin to taper off during 2008, leading to a brief pause in economic growth and prices before the next round of economic growth.

In addition, Zigomanis expects a further 0.25 percentage point interest rate rise by September 2007 will have a dampening effect on residential price growth across all markets in 2007/08, despite healthy underlying demand for new housing and a rising shortfall of dwellings in a number of markets.

BIS Shrapnel forecasts interest rates will then remain on hold and expect this stable interest rate environment, coinciding with continued wages growth, will facilitate an acceleration in both construction and price growth in most markets from 2008/09.

“The upturn in residential property price growth will be driven by significant pent up demand for new dwellings at the national level and in particular capital city markets,” said Zigomanis.

“This is already evident in tight vacancy rates in each of the capital city markets, with the rental situation expected to become even more acute over the next two years. This will drive strong rental growth which will result in improved yields and will have a flow through effect on investor demand for new dwellings and help to buoy construction levels.”

Outlook by region

New South Wales

House prices in Sydney decreased by 1% in 2005/06 and an estimated 2% in 2006/07. A forecast interest rate rise during 2007 and moderate economic growth in 2008 will likely have a further dampening effect on prices.

Total price growth over the three years to June 2010 in the Sydney market is forecast to be 8%. BIS Shrapnel expects a substantial deficiency in the number of dwellings will emerge in the Sydney market towards the end of this decade, making Sydney one of the leading price performers towards the end of this period as a very tight rental market buoys demand for residential property. However, in the short-term the upturn will be delayed as wages growth catches up with price levels and affordability improves.

Price levels in Newcastle and Wollongong are significantly lower than Sydney with these markets benefiting from an influx of residents due to the lack of affordability in the capital. Consequently underlying demand is relatively solid and BIS Shrapnel expects prices to hold up better in these centres. Total growth in the median house price in Newcastle during the three years to June 2010 is forecast to be 13%, while the total rise for Wollongong is forecast to be 11%.

Victoria

Moderate growth is expected in Melbourne where affordability has not been as strained as Sydney and there is scope for a rise in the median house price that is broadly in line with growth in the average household income, according to Zigomanis.

The growth in Melbourne’s median house price has slowed considerably since 2003. The combination of modest price growth between 2003 and 2006 and wages growth has offset rising interest rates and the affordability measure for Melbourne has effectively remained steady in this period, according to BIS Shrapnel. Consequently there is evidence of stronger price growth coming through now and Zigomanis estimates 6% growth in the median house price in 2006/07.

Total growth of 18% is forecast for the Melbourne median house price over the three years to June 2010, with growth forecast to accelerate through to the end of this period as economic growth begins to gain traction.

Queensland

The south east Queensland markets (Brisbane, the Gold Coast and the Sunshine Coast) are forecast to show the strongest price growth out of the major Australian centres through to 2010. These markets experienced slower conditions during 2004/05 and 2005/06, improving the affordability outlook.

The state has continued to experience strong underlying demand which has resulted in a deficiency of housing as economic growth has accelerated and wages growth remained strong. Strong population growth has continued and with the slowdown in residential construction, this has resulted in a significant deficiency of housing that Zigomanis believes will drive the upturn in this region.

Consequently, Zigomanis forecasts price growth in the Brisbane market to be 5% in 2007/08 as economic conditions ease, with growth forecast to accelerate through to 2009/10. Total growth in the Brisbane median house price of 22% is forecast over the three years to June 2010.

House prices on the Gold Coast and Sunshine Coast have generally moved in tandem with Brisbane, and have also benefited from net interstate migration inflows, though both regions are expected to move into upturn later than Brisbane. In the Gold Coast, BIS Shrapnel forecasts prices to rise 16% over the three years to June 2010, while the Sunshine Coast is expected to increase by 15% over the same period.

Price growth in Townsville and Cairns remained strong in 2005/06 due to a more favourable level of housing affordability than south east Queensland and strong local economic conditions due to the resources boom. Growth in the median house price in these areas is forecast to remain strong in 2006/07, though is expected to slow in 2007/08 and 2008/09 as investment in the resources sector slows, with stronger price growth forecast to return from 2009/10, according to BIS Shrapnel.

South Australia

As with Melbourne, moderate growth is expected in Adelaide where affordability remains relatively attractive compared to the eastern state capitals and Zigomanis believes there is scope for growth in the median house price that is broadly in line with growth in the average household income.

Growth in Adelaide’s median house price slowed to 4% in 2005/06 but improved marginally to an estimated 5% in 2006/07, despite the three interest rate rises during 2006. Total growth in the Adelaide median house price of 16% is forecast over the three years to June 2010, with price growth accelerating slightly towards the end of this period.

Western Australia

The Perth median house price has grown 184% between June 2001 and March 2007, underpinned by an increase in underlying demand and booming economic conditions led by strong investment in the resources sector.

However, Perth has become the second least affordable city in Australia to purchase a property (after Sydney) and BIS Shrapnel believes there are signs that price growth is now beginning to taper off.

Zigomanis believes property prices have overshot and that a mild correction is likely to occur over the next three years in the Perth market. As the growth in mining investment slows, economic conditions will not be sufficient to maintain further growth in prices, and BIS Shrapnel forecasts median prices to fall by a total 5% over the 2007 to 2010 period.

Tasmania

Following a 94% increase in the Hobart median house price in the two years to June 2004, growth slowed to 3% in 2004/05, before a modest increase to 6% in 2005/06, according to BIS Shrapnel.

Zigomanis estimates growth of 6.5% during 2006/07. Price growth is forecast to soften from 2007/08 through to 2009/10 as interstate migration once again reverts to an outflow, with total growth of 7% forecast over the three years.

Australian Capital Territory

Following a 5% decline in Canberra’s median house price in 2004/05, prices rebounded in 2005/06 and 2006/07 as strong growth in Federal Government employment and wages boosted interstate migration numbers, according to Zigomanis. Growth is expected to be moderate over the next three years, supported by solid household income growth, with a total rise in the median house price of 15% forecast for this period.

Northern Territory

Darwin’s median house price increased by 25% in 2005/06, capping off total growth of 70% over the three years to June 2006, according to BIS Shrapnel. The Northern Territory’s residential property market has benefited enormously from the resources boom and very strong employment growth.

Zigomanis estimates the Darwin median house price increased 9% in 2006/07 and is forecast to grow by a minimal 3% over the three years to 2009/10 as an easing of the resources boom has a waning effect on demand.

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