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Australian housing markets to run out of steam from 2017: BIS Shrapnel

Low interest rates will support further price growth in undersupplied residential markets in 2015/16, but the spectre of tightening interest rates and deterioration of affordability will create conditions for price declines in a number of cities from 2017, according to leading industry analyst and economic forecaster, BIS Shrapnel.

But doomsday predictions for the residential market are likely to be overblown. Although Australia's residential property markets are forecast to steadily weaken from 2016/17, as a combination of rising supply and the prospect of a tightening in interest rate policy impacts on prices, any downturn will be similar in magnitude to that seen over 2011-2012.

According to the company's Residential Property Prospects, 2015 to 2018 report, Sydney and (to a lesser extent) Melbourne have broken away from the other capital cities, with both estimated to have recorded double-digit percentage rises in their median house prices in 2014/15. Solid population growth, reasonably positive economic conditions and an underlying dwelling deficiency have underpinned this rise, and affordability is increasingly becoming a concern. In contrast, weaker recent price growth in the other capital cities means that affordability is not as strained, and it is subdued local economic conditions and/or an underlying excess dwelling stock that have impacted the market.

BIS Shrapnel senior manager and study author, Angie Zigomanis, said that although low interest rates will continue to support prices, it is the demand and supply balance across the states that will play a part in the rate of price growth in the coming years. Moreover, the boom in apartment construction over the past couple of years is creating a disconnect in the supply balance between detached houses and units, with a resulting difference in their price outlook.

"Most capital cities are building apartments at record rates, driven by investor demand," said Mr Zigomanis. "As these projects are progressively completed, strong tenant demand will be required to support rents and consequently values upon completion.

"However, we are seeing population growth nationally begin to slow. Net overseas migration has fallen from a recent peak of 235,700 persons in 2012/13, to an estimated 184,000 persons in calendar 2014. With the majority of net overseas migration classified as 'long term overseas visitors', that is, temporary but not permanent arrivals, this reduction will impact most on the rental sector. Moreover, this slowdown in net overseas migration is most evident in the mining boom states of Western Australia, Queensland and Northern Territory."

The detached house market is less reliant on tenant demand and more exposed to owner occupiers. Together with the stimulatory effect of variable interest rates at more than 40-year lows, this is expected to support median house prices in most capital cities over 2015/16.

The strongest conditions over 2015/16 are forecast for New South Wales, Queensland and Victoria, where BIS Shrapnel estimates the markets are in overall deficiency at June 2015. While increasingly difficult affordability in Sydney and Melbourne should see price growth return to single digits over the year, weaker recent price growth in Brisbane is likely to see price growth accelerate as the cuts to interest rates in the first half of 2015 further improve affordability.

Across the other markets, rapidly weakening economies in Western Australia and Northern Territory – as mining investment is wound back – will cause price growth to be flat to negative in Perth and Darwin respectively. With an estimated oversupply, the markets in South Australia, Tasmania and Australian Capital Territory are expected to remain relatively flat.

The change in gears from resource investment to domestic demand driving the economy will be slow, although it is forecast to eventually come through and begin to have a positive effect on the economy and employment later in 2016. To some extent, the improving economy will support house prices, although it will also signal the beginning of a tightening in interest rate policy.

"Interest rates are expected to enter a tightening phase towards the end of 2016," said Mr Zigomanis. "After recent wage constraint, the Reserve Bank is expected to 'fire a shot across the bow' to curb wage expectations and alleviate potential inflationary pressures."

While the cash rate is forecast to rise by only 50 basis points in total, this will impact the Sydney and Melbourne residential markets where recent price rises are seeing affordability worsen to levels approaching previous interest rate peaks in 2008 and 2010/11. The rise in interest rates – and anticipated possibility of further increases – will also weaken the other markets, while also having the desired effect of slowing economic growth and inflationary pressures.

Consequently, residential market conditions are forecast to weaken over 2016/17 and 2017/18, with the impact of higher rates and a slowing economy compounded by rising supply.

Nationally, BIS Shrapnel anticipates a record 210,000 new dwellings will be commenced in 2014/15 and 200,000 in 2015/16, with multi-unit dwellings accounting for a record 45 per cent of the total in 2014/15 at 95,500 dwellings.

Total dwelling construction compares with an average underlying demand for 159,200 new dwellings per annum over the next three years. As these dwellings reach completion, all states with the exception of New South Wales will have moved into oversupply, or be experiencing an increasing oversupply.

"With the price pressure of the stock deficiency of recent years being steadily alleviated, BIS Shrapnel expects all markets to weaken over 2016/17 and 2017/18, with house prices largely flat or in decline over this period," said Mr Zigomanis.

The strongest house price growth over the next three years is forecast for the Brisbane market, where affordability has improved significantly after weak price performance, and low dwelling construction means there is a deficiency in place. The momentum in the Sydney market is also expected to continue for now. However, as rising new dwelling supply works its way through to completion, pent up demand pressures will ease and the strains on affordability as interest rates rise will take their toll, leading to a forecast price decline by 2016/17. House prices in the Melbourne market are forecast to show a moderate rise in 2015/16, but begin to decline over 2016/17 as large swathes of new apartment supply in particular are completed and impact the broader market.

The Perth and Darwin markets are forecast to progressively weaken with declines in prices as resource sector investment continues to weaken and impact local economic conditions. At the same time, excess supply is forecast to continue to dampen the markets of Adelaide, Canberra and Hobart, together with sluggish local economic conditions. However, without any deterioration in the economic outlook to cause the unemployment rate to rise sharply, interest rates are expected to remain low enough to provide some support prices as investors should be able to meet their mortgage repayments despite potentially discounting rents, and vendors will also be able to hold on until they achieve their desired prices.

Where state markets are measured to be in overall oversupply, BIS Shrapnel estimates that the excess stock will be concentrated in the unit sector, where there has been investor-driven record levels of construction. The consequences are already being seen in the unit market, with median unit price growth being below median house price growth across nearly all capital cities over 2014/15.

In comparison, median house price growth has been stronger. The upturn in new detached house construction over the last two to three years has lagged that of apartments, and where state markets are expected to move into a rising oversupply, BIS Shrapnel estimates that the excess stock will be concentrated in the unit sector, with detached houses either undersupplied, or only experiencing a modest excess.

Nevertheless, the easing of supply pressures means that only the Brisbane market is forecast to have experienced any growth in house prices in real terms by June 2018, with all remaining capital cities forecast to have recorded real price declines totalling up to 10 per cent. Across the unit market, all capital cities are expected to experience greater real declines in unit prices ranging from four per cent to 12 per cent over the three years to June 2018. With overseas buyers only able to purchase new apartments, the resale market will be more limited, being confined to local buyers.

House
Above: House / 'Shadows' / by Bill Lane.

Outlook for price growth by region


Sydney

Sydney's estimated median house price of $960,000 in June 2015 represents a sizeable 45 per cent increase over the past three years. Sydney's undersupply of dwellings is underpinning the price growth, which is being stimulated by strong state economic conditions and very low interest rates.

Affordability is now becoming increasingly strained, and despite current low interest rates, is getting to a level to when interest rates last peaked in 2010/11. Nevertheless, Sydney's dwelling deficiency, combined with healthy sentiment in the market and strong investor demand, is expected to continue to underpin further price rises in this environment – although price growth is forecast to ease back to single digit percentage growth of seven per cent over 2015/16.

Strong population growth, as New South Wales records record-low net interstate migration outflows, is preventing Sydney's dwelling deficiency being absorbed at a greater rate than would otherwise be expected.

"Regardless, completions will continue to rise, and the slow erosion of the deficiency will also coincide a forecast tightening in interest rate policy over 2016/17," said Mr Zigomanis. "The combination of higher interest rates and recent price growth is expected to discourage both owner occupiers and investors, particularly as pent up demand pressures are beginning to ease."

This will bring about median house price falls totalling four per cent over 2016/17 and 2017/18, with total price growth in Sydney over the three years to June 2018 forecast to be two per cent – resulting in a real decline of six per cent over the period. With a greater reliance on investors, who are currently accounting for more than half of residential finance in New South Wales, price performance is forecast to be weaker, with the median unit price at June 2018 forecast to be one per cent below the June 2015 median.

Newcastle and Wollongong

Residential property prices in Newcastle and Wollongong usually benefit when Sydney experiences strong price growth and migration into these regional centres increases. This is already evident in the Wollongong market, where vacancy rates have fallen and the median house price rose by 14 per cent in 2014/15. However, declining resource sector investment is resulting in weaker economic conditions in the Hunter region, and migration from Sydney has been lower given the more limited employment opportunities. Median house price growth was only five per cent in Newcastle in comparison in 2014/15.

Price growth is forecast to continue in both centres as Sydneysiders continue to seek refuge in these more affordable markets. Given the more limited recent price growth in Newcastle, there is likely to be more upside as economic conditions in the Hunter begin to recover. As a result, growth in the median house price is forecast to total 10 per cent in Wollongong and 15 per cent in Newcastle over the three years to June 2018, being concentrated in the first two years, and slowing over 2017/18.

Melbourne

The Melbourne market has experienced average price growth of nine per cent per annum over 2013/14 and 2014/15. While activity and price growth has largely occurred in the higher value inner and middle ring suburbs, price growth has begun to expand to outer suburbs.

The Melbourne market has been underpinned by strong net overseas migration inflows, as well as unprecedented net interstate migration inflows, which were higher than the other states. This has allowed population growth to match the elevated level of new supply that has come on line in the Melbourne market over recent years, and the state is still estimated to have a marginal deficiency overall at June 2015.

However, net overseas migration has been trending downwards, while new dwelling construction, particularly for apartments, is now again at record levels. BIS Shrapnel anticipates that an emerging oversupply will be concentrated in the apartment sector as the pipeline of projects work their way through to completion. Victoria is also facing headwinds in key sectors such as manufacturing and construction that will dampen economic conditions.

"The potential for continued solid growth in Melbourne's median house price is limited given the potential for oversupply and weakness in the state economy," said Mr Zigomanis. "As a result, the rate of price growth is forecast to progressively slow over the next three years, particularly as interest rate policy begins to be tightened.

"Median house price growth in Melbourne is forecast to total only four per cent over the 2015 to 2018 forecast period, with a five per cent rise in 2015/16 offset by a small fall in the following two years. After accounting for inflation, prices are forecast to fall by four per cent in real terms. Given the level of apartment supply due to come through, there is greater downside in the apartment sector, where the median unit price is forecast to fall by a total of four per cent in the three years, or 12 per cent in real terms."

Brisbane

Brisbane's estimated median house price of $520,000 in June 2015 represents a seven per cent increase for the year. Median house price growth in the Brisbane market has now averaged five per cent per annum over the past three years.

The Queensland market has been in underlying deficiency in this period, with Brisbane experiencing vacancy rates below the balanced market rate of three per cent in this time. Moreover, despite the recent moderate price growth, Brisbane's median house price remains five per cent below its June 2010 peak in real terms. Together with the low interest rate environment, affordability in Brisbane is at levels seen in the early 2000s, and this will help to underpin further price rises.

"The Brisbane market remains patchy, but is expected to experience broader price growth in 2015/16 as buyer confidence improves," said Mr Zigomanis. "Median house price growth of seven per cent is forecast over the year."

However, the pace of price growth is likely to be moderate, with economic conditions still relatively subdued and net interstate migration inflows at low levels.

While signs of improvement are emerging in new house construction, the new apartment market is booming, particularly in inner Brisbane. This will impact on new dwelling supply overall, and without any significant rebound expected in population inflows, the apartment sector is likely to move into oversupply, with some impact across the broader market.

Together with still relatively subdued economic conditions, tightening interest rate policy, and net interstate migration inflows at a low level, price growth is forecast to subsequently ease over 2016/17 and 2017/18. In comparison to some other capital cities, price declines are not expected for houses, with the housing sector expected to remain in undersupply. In contrast, rising completions of apartments will see weaker performance in the unit sector.

A total rise of 13 per cent in the median house price is forecast over the three years to 2018, while the median unit price is forecast to rise by a total six per cent. Significantly, Brisbane is expected to be the only capital city that will not experience a decline in median house prices in real terms in the next three years.

Gold Coast and Sunshine Coast

House prices on the Gold Coast and Sunshine Coast have generally moved in tandem with Brisbane, benefiting from the same drivers of population growth as the capital; that is, primarily net interstate migration inflows and, to a lesser extent, overseas migration. Without the diversified economic drivers of Brisbane, these markets have underperformed in recent years.

However, an extended period of weak construction means that both of these markets have moved into an undersupply and vacancy rates have become very tight. Both the Gold Coast and Sunshine Coast are now seeing moderate price growth come through, experiencing median house price rises in the order of five to six per cent per annum over the past three years.

From an economic perspective, large construction projects (Pacific Fair and Commonwealth Games in the Gold Coast, and the Sunshine Coast University Hospital on the Sunshine Coast) are contributing to local employment.

Consequently, further price growth totalling 13 per cent and 12 per cent is forecast over the three years to June 2018 in the Gold Coast and Sunshine Coast respectively, although progressively slowing over this period as interest rates rise and new building alleviates some of the supply pressures.

Townsville and Cairns

The Townsville market has steadily weakened over the past three years as the impact of falling resource sector investment has impacted on housing demand, causing vacancy rates to rise and prices to ease. In contrast, the Cairns market did not experience the same benefit from the mining investment boom, with the post-GFC collapse in construction now resulting in a rising dwelling deficiency emerging.

The Townsville market is forecast to remain relatively weak through to 2017/18, as investment in resource sector projects continues to subside. However, given the falls in price growth that have already occurred in recent years, prices are not expected to fall further, and may even begin to rise toward the end of this period as lower construction sees a dwelling deficiency emerge. More upside exists in Cairns, where a combination of low interest rates and tightening vacancy rates have contributed to a six per cent rise in the median house price in 2014/15. This will be complemented by strengthening local economic conditions, with a lower Australian dollar contributing to strong growth in local and overseas tourism, and in turn employment.

Consequently, cumulative price growth over the three years to 2018 is expected to be three per cent for Townsville and 11 per cent for Cairns. Sharp rises in insurance costs after recent cyclones in Queensland's north are likely to be having a greater impact on the Townsville market, where the lack of rental growth means that cash flows for investors have deteriorated, whereas rent rises in Cairns have somewhat offset some of this impost.

Adelaide

Adelaide's estimated median house price of $450,000 at June 2015 represents a three per cent increase for 2014/15.

"The dwelling excess in the South Australian market after the post-GFC surge in construction began to be absorbed over 2012/13 and 2013/14, resulting in some improvement to prices," said Mr Zigomanis. "However, the excess has increased in 2014/15 as purchasers and builders have responded to large and temporary increases in incentives to first home buyers of new dwellings.

"This rise in construction is coinciding with slowing underlying demand as net overseas migration inflows ease. With the state continuing to face headwinds in a number of industry sectors, there will be little to place upward pressure on prices apart from low interest rates."

As a result, the residential market in Adelaide should remain challenging, with the median house price forecast to be only one per cent higher at June 2018 than at June 2015, while the median unit price is forecast to be one per cent lower as rental growth also suffers from the oversupply. In real terms the median house and unit price are forecast to decline by seven per cent and nine per cent respectively.

Perth

The Perth residential market is steadily weakening as declines in resource sector investment have a negative impact on employment and population growth. After a 16 per cent rise in the two years to June 2014, Perth's median house price has declined by three per cent in 2014/15, to an estimated $580,000 at June 2015.

"Purchaser demand is now tapering off, with demand across first home buyers, subsequent home buyers, and investors all beginning to weaken," said Mr Zigomanis. "Net overseas migration inflows are also slowing rapidly, having declined from 53,000 in 2011/12 to 19,000 in calendar 2014, while Western Australia will record its first annual net interstate migration outflow in 12 years in 2014/15.

"Consequently, vacancy rates have risen and rents have fallen, which in turn has resulted in the price decline in 2014/15.

"Perth's median house price is forecast to continue to fall over 2015/16 and 2016/17, and stabilise in 2017/18, when mining investment is expected to bottom out. The corresponding decline in new residential construction is expected to see the market also move back toward balance around this time"

BIS Shrapnel is forecasting Perth's median house price to be three per cent lower by June 2018 compared to June 2015 levels, representing a decline in real terms of 10 per cent. A similar decline is forecast for Perth's median unit price.

Hobart

The Tasmanian residential market has been experiencing a period of overbuilding, with construction in the state most recently experiencing an uplift in response to an increase in grants to first home buyers of new dwellings to $30,000 in 2014 (which has fallen back to $20,000 up to the end of June 2015). Hobart's median house price growth has been limited to three per cent per annum in 2014/15, taking the median to an estimated $365,000 at June 2015.

This boost to building will prolong the state's oversupply at a time when local economic conditions are challenging. Nevertheless, given the recent and prospective price growth in Sydney and Melbourne, there is potential upside to underlying demand if the state experiences a net interstate migration inflow, similar to the early 2000s when interstate arrivals – largely "tree change‟ migrants from the mainland (mainly from New South Wales and Victoria) – increasingly took advantage of price gains to sell their homes to downshift to Tasmania. There are also likely to be some returnees from the mining states as resource sector investment dries up.

"Regardless, the rise in construction and limited population growth means that the current excess supply is likely to persist over the next three years," said Mr Zigomanis. "However, prices are expected to remain relatively stable, firstly due to low interest rates and subsequently as interstate migration begins to improve."

As a result, Hobart's growth in median house price is forecast to be limited to a total of four per cent over the next three years, reflecting a decline of four per cent in real terms. Greater downside is expected for units as investors respond to the limited rent and price outlook, with an overall two per cent decline (10 per cent in real terms) forecast through to 2018.

Canberra

Canberra's median house price is estimated to have experienced a minimal rise of two per cent over 2014/15, with the median at $560,000 as of June 2015. New dwelling activity in Canberra has been particularly strong in recent years, with apartment development being sustained at record levels. BIS Shrapnel estimates there is an underlying oversupply in the Canberra market, and this is reflected in a vacancy rate in excess of four per cent, compared to a balanced rate of three per cent.

"Demand is also likely to be curtailed in this high supply environment," said Mr Zigomanis. "Cuts to Federal Government departments are having an impact on employment and population growth in the capital, with interstate migration recording net outflows in the past three years after net inflows in previous years.

"In this environment, Canberra's oversupply is likely to be sustained for some time and this will impact on prices. Nevertheless, Canberra has the highest incomes of the capital cities and affordability is not as strained as in the other cities, which should therefore also prevent any major price declines.

"Consequently, the median house price is forecast to be more or less flat over the three years to June 2018 (a total rise of three per cent), which reflects a decline of five per cent in real terms. In contrast, the unit sector, where the oversupply is concentrated and which has experienced a four per cent decline in 2014/15, is forecast to experience a further two per cent decline (10 per cent in real terms)."

Darwin

After rising by six per cent in 2013/14, Darwin's median house price rose an estimated one per cent in 2014/15 to $550,000 at June 2015. The increase in resource sector investment led by the Icthys LNG project is now topping out, with little further growth in work done to stimulate employment growth and price growth.

"Moreover, there have been substantial increases in new dwelling activity in response to population growth and price growth through the upturn," said Mr Zigomanis "With migration inflows now slowing while dwelling completions continue to increase, the Northern Territory market is moving into oversupply and this is being reflected in high vacancy rates in Darwin.

"Consequently, prices are forecast to weaken further as the investment phase of the Icthys project winds down, with the median house price forecast to decline by a total two per cent in the three years to June 2018, which will result in a real house price decline of 10 per cent over the period. With much of the new dwelling supply being in the unit sector, median unit prices are forecast to fall by four per cent over the same period, or a real decline of 12 per cent."

About BIS Shrapnel

BIS Shrapnel is Australia's leading provider of industry research, analysis and forecasting services. BIS Shrapnel helps clients better understand the markets in which they operate, through reliable and detailed market data, analysis of developments and drivers and thoroughly researched forecasts.

BIS Shrapnel compiles accurate, clearly explained and detailed information on industry sectors, markets and industries in which their clients operate. BIS Shrapnel provides market size and segmentation data, market shares, consumer attitudes and supplier reputation information, and regularly conducts both business-to-business and consumer research.

Over the company's 51-year history, BIS Shrapnel has built up a strong level of expertise and unique methodologies for forecasting.

More information about BIS Shrapnel is available from <http://www.bis.com.au/>.

The Residential Property Prospects 2015 – 2018 report is available from <http://www.bis.com.au/reports/res_prop_prospects_r.html>.

Note from Urbanalyst: The above summary is sourced directly from the document and/or accompanying documentation. Aside from minor editorial modifications, the information is presented as-is.

Photo: House / 'Shadows' / Bill Lane / Licensed under Creative Commons BY-NC-ND 2.0.

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