House price growth to slow, crash unlikely

RESIDENTIAL markets across Australia are expected to weaken over the next year, as prudential measures and supply imbalances begin to take effect – but a crash is unlikely.

BIS Oxford Economics’ Residential Property Prospects 2017 to 2020 report, suggests a record number of new dwelling completions will see most undersupplied markets fall into oversupply, and surplus stock levels persist in other markets.

Low interest rates and a stable economic environment will safeguard the overall market from the weight of forced sales required to drive down prices in an “American-style crash”.

BIS Oxford Economics senior manager and study author, Angie Zigomanis, said recent moves by the regulator to slow growth in bank lending to investors, via reduced interest-only loans, are expected to cause investors to retreat.

“Price growth is forecast to weaken in a similar way to 2015/16 when the regulator first began to encourage a tightening in lending to investors. Further complicating matters is the rapid rise of new dwelling completions, which is resulting in a growing supply/demand imbalance that will also contribute to dampen price growth,” he added.

He said the boom in apartment construction is creating a different demand/supply outcome to the housing market in a number of cities, which will impact the house and unit markets in different ways.

“New apartment completions in Australia will hit a record in 2016/17, which have been largely bought off- the-plan by investors.

“As the apartment buildings are progressively completed, most cities will find that tenant demand will not be sufficient to support rents and consequently values,” Zigomanis said.

The report said that following the record number of 231,700 new dwellings that commenced in 2015/16, a further 218,000 dwellings are expected in 2016/17.

This will bring an end to three years of 200,000-plus dwelling starts per year, a figure well above the previous record of 187,100 dwellings in 1994 and the underlying demand for new dwellings of an estimated 172,100 dwellings per annum from 2017/18 through to 2019/20.

Meanwhile a HIA Housing Outlook Report released yesterday expects 221,500 new dwellings will have been started in 2016/17, still a decline of 4.5% compared with the previous year, before a further reduction of 10.7% for 2017/18 and bottoming out at 176,670 during 2018/19.

“The multi-unit side of the market is expected to drive the downturn in residential building, with commencements on this side of the market projected to fall by 41% from peak to trough,” HIA’s chief economist Shane Garrett said.

The HIA said renovations work would grow by 2.0% during both 2017/18 and 2018/19 and pick up the following year to 2.7%, taking the renovations market to $34.31 billion in value during 2019/20.

BIS Oxford Economics forecasts subdued population growth, economic conditions and employment outlook to lead to states experience some level of oversupply over the coming three years, with the exception of the heavily undersupplied NSW. The drop-off in construction levels will drag on economic conditions until business investment takes over as the next driver of growth at the end of the decade.

Zigomanis said the outlook will be different from city to city, as well as between the house and unit markets, with the latter expected to face more challenges than the detached house market in the coming years.

“Moves by the Australian Prudential Regulation Authority (APRA) to further constrain growth in investor lending will play a part in this difference.

“In New South Wales and Victoria in particular, where the strength of investor demand has been a key driver of the Sydney and Melbourne residential markets respectively, the decline in investor activity is expected to impact price growth,”

“As investor expectations of capital gains are reduced, investor demand is expected to weaken further, creating additional downward pressure on prices,” he added.

The detached house market’s higher exposure to owner occupiers has seen it benefit from cuts to variable interest rates and lending to owner occupiers stabilise in 2016/17 at elevated levels.

“This should continue to provide some support to median house prices as investor demand falls away,” Zigomanis said.

The absorption of some excess stock in a number markets may begin from 2019/20 as new dwelling construction slows down.

Since 2012/13, house price growth has mostly been isolated to Sydney and Melbourne. Hobart and Canberra joined them only in 2016/17 and limited growth has been seen in other markets, whilst Perth and Darwin have seen weakening in line with the wind-up of the resources boom.

Other capital cities have experienced only limited house price growth in this time, while house prices in Perth and Darwin having fallen.

New KPMG research expects Sydney median dwelling prices to peak at about $980,000 in the FY2019, up from $880,000 in the middle of 2016, before drifting back to between $930,000 and $950,000 by the end of FY2021.

It forecasts Melbourne’s prices to peak next year before a plateau over one to two years, and further growth. The peak is forecast to be between $720,000 to $740,000 by the end of FY2019, from about $650,000 at the end of June 2016. Another wave of growth will see prices hit between $775,000 and $825,000 by the end of FY2021.

Over the year to March 2017 dwelling prices increased across the eight capital cities by 10.2%, according to the Australian Bureau of Statistics. Sydney and Melbourne continued to outpace the rest, with 14.4% and 13.4% price growth respectively.

Hobart was next with 11.3%, following by Canberra (8.9%), Adelaide (5.0%), and Brisbane (3.5%). Perth and Darwin saw prices fall over the period by 3.5% and 5.9%.

Australian Property Journal

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