Housing prices will grow by over 20% in the next three years due to shortages in key capital city areas and strong migration, especially in Sydney, a new BIS Shrapnel report reveals.
But one property expert believes the forecasts aren’t justified and says it is simply too hard to make three year predictions due to unforeseen circumstances.
The results also differ from a new survey released by NAB today, which predicts housing prices will only grow by about 1.5% over the next 12 months.
SQM Research founder Louis Christopher says the latest results from the BIS Shrapnel Australian Housing Outlook 2010-2013 report are set too far in the future to be 100% accurate.
“I question the accuracy of their previous forecasts. You will find that previous forecasts were not necessarily accurate. In Sydney it’s not beyond the realm of possibility to see a 20% increase, but I think it’s very unlikely.”
Indeed, BIS Shrapnel analyst Angie Zigomanis says the previous forecasts “underestimated” the impact of the first home buyers’ stimulus and low interest rates.
Last year’s report predicted that prices in Sydney, Adelaide and Melbourne would grow by 19% over the next three years. Those predictions have changed following a year of unusual growth where prices increased by over 20% in Melbourne alone.
“We underestimated a number of aspects in the 2010 financial year figures. We underestimated the level of activity the first home buyers’ and low interest rates would push forward. Our view was that the economic outlook would be benign, but that wasn’t the case.”
Christopher says the forecasts don’t take into account “X factors”, and making three-year predictions is much too difficult for one report.
“There are so many X factors out there, it’s very difficult to take into account everything that’s going to happen. It’s possible, but you need to provide the basis for your assumptions. Assumptions for interest rates, assumptions for GDP growth, and assumptions for employment and wages.”
The new report claims the strongest growth will be found in Perth, with 3.1% growth in 2011, 7.9% growth in 2012 and 8.3% growth in 2013. Sydney comes in second, with growth expected of 4.2% in 2011, 6.2% in 2012 and 8.7% in 2013.
Zigomanis says the growth, when spread out over the next three years, represents not so much a bullish market but more steady, realistic growth.
“The top forecasts are seeing about 7-8% per annum, which is doing well but isn’t necessarily speeding along. There are a few issues with Sydney in that it’s been in a downturn for quite some time.”
“But there has been a massive shortage, construction has been at decade lows and migration is still very strong. There is a significant shortfall of dwellings and that will keep pushing up prices.”
The story is similar in Perth, Zigomanis says, where the continued resources boom and a take-up in first home buyer activity should help activity. “We expect first home buyer demand to return that will facilitate demand,” he says.
But during the next three years, BIS also expects the variable housing rate to reach 9.1% by June 2013. Zigomanis says the impact of those increase will be spread out over time, with only one 25 basis point rise during 2010-11, by which time confidence will have improved.
“This will to some extent overcome further rate rises of 75 basis points forecast over the year, and there should be some momentum in prices appearing in 2011/12,” he says.
However, while Sydney and Perth may be set for strong growth, along with Adelaide which is also forecast to record 19.5% growth by 2013, Melbourne prices will struggle. Zigomanis says prices in Melbourne will increase by only 2.9% in 2011, 3.5% in 2012 and by 2.5% in 2013, as the city is set for a correction.
“Melbourne has had the strongest rebound in prices over the past year, and depending what numbers you use prices have gone up by well over 20%. Affordability is starting to become strained. Construction is also doing fairly well in Melbourne, and is keeping with demand, which will keep pressure in that area low.”
Growth in Brisbane is also set to slow over the next few years, the report claims, with growth of just 3.3% in 2011 and 5.3% in 2012. Zigomanis says this is mostly due to the global financial crisis, saying, “Brisbane was one of the worst hit cities in the country.”
“We expect a lot of economic factors will override price growth in Brisbane. The supply is doing quite well there, so the main issue in Brisbane and the Gold Coast is the economic factors there.”
Hobart is forecast to record growth of 13.2% by 2013, while Darwin is also set to see growth of 11.7% over the next three years. Canberra will see growth of 2.7% in 2011, 4.4% in 2012 and 4.2% in 2013.
The BSI report also claims low unemployment will keep housing prices steady, even though interest rates are set to rise.
“Wage cost inflationary pressures are unlikely until the unemployment rate falls below 5%. Although the latest published rate of 5.1% at August 2010 is close to this level, it appears that this figure contains some slack, and hours worked will increase before the unemployment rate falls further. On this basis, the unemployment rate is expected to hover around this level and not move below 5% until closer to the end of 2011.”
Increased population growth, especially among younger buyers, is also used as part of the predictions for strong take-up of first home buyer finance.
“Analysis of the first home buyer market in “Prospects for First Home Buyer Demand” produced by BIS Shrapnel for QBE LMI in April 2010, suggests that, without the First Home Owners grant (and with higher interest rates), first home buyers are now adjusting their purchase preferences, increasingly opting for smaller dwellings, or established dwellings over new dwellings.”
“In addition, strong population growth is coming through in the key 25–34 year old demographic, providing an increasing pool of potential first home buyers.”
The NAB survey, however, is less optimistic. It claims prices will grow by 5% in Canberra over the next 12 months, along with 3.3% growth in Adelaide, 2.7% in Sydney, 1.6% in Perth and by 1.3% in Melbourne. Brisbane is only set to record a 0.1% in prices, the report claims.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
