Property research company BIS Shrapnel has produced its regular assessment of the prospects for Australia’s residential property market and unsurprisingly, the news from BIS is very positive. The report suggested that Melbourne and Sydney residential property could increase in value by as much as 19% by 2012. Melbourne median house prices are tipped to increase from $425,000 to $507,000, while Sydney medians are forecast to rise from $530,000 to $630,000.
BIS Shrapnel senior project manager, Angie Zigomanis, told media that “we expect rising confidence in the prospects for an economic recovery in 2010, so investors are likely to return in greater numbers, attracted by increased rental returns and low interest rates.”
We are not sure what economic data Ms Zigomanis and BIS have been analysing, but perhaps they haven’t been keeping too close an eye on the latest moves by Australian banks to raise interest rates in response to increasing wholesale funding costs (and lack of competition). Further, the interest rate yield curve suggests that rates are likely to rise, rather than fall in the coming years (interest rates are currently at historical lows). Meanwhile, the US and UK are undertaking quantitative easing (also known as printing money), in a desperate bid to stave off asset-deflation, potentially leading to inflation and the need for further interest rate rises.
House prices are currently being boosted by the First Home Owner’s Grant, which, coupled with loan-to-valuation ratios of upwards of 90%, has resulted in a boom in the otherwise “affordable sector” of the housing market. (This boom has spilled to the upper-affordable level, as those who sell properties to first home buyers have more to spend on their upgrade).
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When the boosted FHOG falls away later this year, if interest rates return to 7-8%, it is a more logical response that house prices will fall in the coming years, rather than rise. While auction clearance rates have spiked to upwards of 80% in Melbourne (and above 70% in Sydney and Brisbane), this appears to have been a result of panicked buying by first home owners, as evidenced by lending commitments to the first home sector hitting 28% earlier this year (in 2007, the figure was closer to 10%). The Financial Review noted this morning that the number of first home owner’s grants was up 67.5 percent in April, compared with the corresponding period in 2008.
As for investors re-entering the market, that is dependant on yields and forecast capital growth. Unless unemployment stays at a reasonably low level (it is forecast to rise to above 8%) and interest rates don’t spike, it is difficult to envisage investors re-entering the property sector.
BIS’ most recent report is not the first time that the researcher has been optimistic on the performance of the property sector — in March 2008, BIS claimed that house prices would rise by 40% within five years (conveniently similar to the average 7.9% annual increase over the past two decades).
One significant yet often unreported problem faced by many home-buyers is a significant information asymmetry. As Crikey has previously noted, unlike publicly traded equities, it is reasonably difficult and expensive for home buyers to obtain detailed information regarding historical price data regarding specific properties. (Larger investors and real estate agents would obtain such information from the likes of RP Data, however, the time and expense often precludes “mum and dad” home buyers from accessing such information).
This problem may be alleviated somewhat through the development of an on-line property information service by SQM Research, a property advisory and forecasting researcher company run by former Australian Property Managers chief, Louis Christopher. SQM’s product (expected to be released shortly) will allow users to determine how long a listed property has been on the market, if the listed price has changed over that period and what the last sale price of the property was (for properties listed from more than 60 days). The “Home Discounts Report” costs $39 per suburb but unfortunately, does not extensively cover Victoria and Western Australia due to privacy requirements.