The Australian housing market is expected to remain weak in the outer suburbs of major cities.
What’s going to happen with housing prices? Because Australians still have a high proportion of their wealth tied up in homes and investment properties, this is always a question of compelling interest.
A good place to start is with what is going on with house and unit prices right now. Fortuitously, Australian Property Monitors has just published its latest estimate of capital city prices. Our table shows the movement in house and unit prices in the December quarter and over the year to December.
APM’s Michael McNamara sums up the housing price picture as sluggish growth across all state and territory capitals in the December quarter. For units, he describes prices as weak across most of Australia. They are falling along the eastern seaboard.
However, these are averages and don’t tell an important part of the story. Just as the resources boom has given Australia a two-speed economy, we also have a two-speed housing market.
Obviously the two are related, as the boom in Perth prices compared with Sydney over the past year shows, for example. (The quarterly figures show how fast the boom in the west is cooling off.)
But there is more to it than this. The two-speed character of the property market also comes out in another way – the very different behaviour of prices in the upper and low to medium ends of the property market.
APM sees a national trend emerging, with premium markets outperforming at the expense of the mortgage belt and outer suburban areas. This could have interesting political implications, given these areas tend to be swing seats.
While individual state capitals will have different factors operating, there is clearly a more general national story behind this as well. We are seeing reflected here the prosperity of the professional and managerial classes, partly related to the resources boom, relative to manufacturing and some other areas.
Sydney is where this story is most obvious, with the latest figures showing house prices in the city’s affluent areas such as Bellevue Hill in the eastern suburbs and Palm Beach in the north rising by 5 per cent in the December quarter. No obvious affordability problem for buyers here. However, prices in Sydney’s southwest, in suburbs such as Macquarie Fields, Narellan and Lakemba, fell by 4 per cent.
A look at the relevant data on what was happening in the months before prices peaked at the end of 2003 shows that house prices and investment property purchases were booming in Sydney’s west, as the less well informed decided to join the speculative frenzy at its peak.
Now there are falling prices, mortgagee auctions and negative equity.
However, while Sydney was the epicentre of the boom, similar, if less dramatic, stories can be told around state capitals. In Melbourne, wealthier suburbs such as Brighton, Portsea and East Melbourne enjoyed double-digit price growth last quarter, while areas such as Broadmeadows and Sunshine languished.
A similar story is emerging in Perth as the property bubble bursts.
According to MacNamara at APM, weak property prices will continue in the mortgage belt and outer suburbs of Sydney, Melbourne and Brisbane for some time.
Unit prices are also likely to remain under pressure for a while yet. Booming stock prices are keeping equities relatively more attractive. There will also be downward price pressure as investment properties are sold to take advantage of the changes to the taxation of superannuation.
For the wealthy, there is an opportunity to pile up to $1million into tax-free super before June 30. There will also be an ongoing incentive for baby boomers approaching retirement to switch their investments from property to super.
And – despite a sharp fall in vacancy rates and rising rents – with the net yield on investment property probably still around 2.5percent, there will be a continuing incentive for investors to sell their geared-up rental properties.
Borrowing at 7.25 per cent, 7.5percent or higher to earn a net yield of around 2.5 per cent is hardly attractive – unless you expect strong capital gains. How likely is this?
In the near term not very, and in the medium term it is unlikely we will see a repeat of the recent price boom. However, there are factors underpinning home and investment property prices.
The most important is a widening gap between demand and supply in the housing market, fed both by frustrated first home buyers and a large immigration program. Initially, closing this gap is likely to involve some further weakness in house prices at the lower end, but then prices will stabilise and begin to rise.
Similarly, the shortage of rental property and rising rents and yields will lift the attraction, and price, of investment properties, but again it will take time and, initially, probably further price weakness.
In the longer term it seems likely that house prices will rise in line with growth in incomes, say by 4 or 5 per cent a year on average, instead of rising much faster, as they did in the boom years. This was never sustainable.
Source: Newscorp
Mr Mortgage 