The national end of month property indices report released by RP Data & Rismark International confirms that the supply and demand imbalance currently being experienced in the Australian property market has placed a floor under housing prices, resulting in minimal value falls.

Based on the analysis in the report, this is most evident in the metropolitan areas around the country where record population growth has not been accompanied by new dwellings to satisfy the housing demand.

According to RP Data National Research Director Tim Lawless, the property market has proven to be remarkably resilient with national dwelling values remaining positive over the 12 months ending August 2008. Over the three months to August 2008 there was a modest decline with property values down by just 0.96 per cent over this period.

Mr Lawless said the recent figures should put to rest claims that Australia’s property market is headed for a crash. “In fact, values are holding relatively firm particularly when compared to the benchmark equities S&P/ASX 200 Index which dropped by 19 per cent between January and August,” he said.

The only capital city to record a material decline in property values was Perth where this market fell by 5.69 per cent over the August 2008 period.

While this fall in values has caused some distress for home owners, Mr Lawless reminds owners that the results need to be placed into context where values increased by 13.9 per cent annually over the past five years.

One of the most interesting findings in the indices’ release today was the convergence of the capital city market dynamics over the past six months which revealed that all capital cities recorded slightly negative growth; no particular city was significantly out of step with the others.

According to Rismark International’s Dr Mathew Hardman “Clearly, the observable phenomenon of the two-tiered markets in Sydney and then in Melbourne and to a lesser extent in Brisbane and Perth has disappeared”

“Market movements are now similar across all metro areas rather than value falls being isolated within the mortgage belts. This balancing can be attributed to the squeeze the more affluent markets are experiencing due to the turbulence in the financial and equities sector.

“Looking towards the next six months, strong excess demand in most capital cities is creating a floor under property values, making large falls unlikely,” Dr Hardman said.

According to RP Data, with population growth projected to remain high and interest rates falling, the demand/supply imbalance is expected to protect the market from any major falls in property values.

Rismark International’s Dr Hardman believes that unemployment is not a major factor driving property prices; affordability, excess demand and market momentum are far more significant he said.

“Although unemployment is rising, unless it grows rapidly to significantly greater levels, e.g. 6 or 7 per cent over the next couple of years, excess demand will eventually outweigh affordability constraints and begin to push property markets upwards again, probably by the second half of 2009.”

“Over the long term, home unit values tend to track GDP growth, while house prices exceed it by approximately 2 per cent. In Sydney, house and unit values relative to GDP have returned to their pre 2000 levels so affordability is slowly returning to the Sydney market,” Dr Hardman said.

Land costs and affordability challenge market

The production of new land throughout many regions in Australia in 2008/09 is to be restricted by a combination of high prices for residential land and the higher interest rates seen during 2007/08, according to economic forecaster and industry analyst, BIS Shrapnel.

According to BIS Shrapnel’s Outlook for Residential Land, 2008 to 2013 report series, the cost of land in Australia has outpaced the growth in house prices in recent years, impacting on demand for new houses along with rises in interest rates in 2007/08.

The report series found that the Sydney and Perth land markets continued to weaken during 2007 and the South East Queensland markets of Brisbane, the Gold Coast and Sunshine Coast had their recovery snuffed out in 2008, while the Melbourne and Adelaide new house markets also showed signs of slowing in 2008 after recording solid growth in 2007.

BIS Shrapnel senior project manager, Angie Zigomanis, said the total increase in housing interest rates of 1.4% in 2007/08, including those independent of the Reserve Bank, have taken their toll on the demand for new housing.

“Despite the easing of interest rates in September 2008 and an increase in the level of underlying demand for land, we are expecting little change in new house and land purchases during 2008/09,” said Mr Zigomanis.
However, this deterioration has been forecast to result in a build up of demand across all states, which is expected to boil over into strengthening new house and land activity from 2009/10.

“Further decreases in interest rates over this period and the restoration of confidence after the settling of financial markets is expected to stimulate increased buyer activity,” said Mr Zigomanis.

“Nevertheless, this improvement will vary nationally, depending on overall affordability in each market, and the level of pent up demand.”

New house activity in Brisbane was found to have been weakening in the first half of 2008 in response to rising interest rates through the financial year. 

The sharp growth in house prices during 2006 to 2008 was found to have caused a further deterioration of affordability that offset the momentum in the market from strong wages and employment growth. In addition, the weakening national economic environment and state house markets are likely to discourage interstate movements into Queensland, which BIS Shrapnel notes are key drivers of demand.

BIS Shrapnel expects this softening to continue into 2008/09 resulting in a modest decline in lot production, despite the continued increase in underlying demand due to record levels of net overseas migration inflows.

Nevertheless, BIS Shrapnel expects this higher underlying demand to cause an upturn in new house and land activity from 2009/10 as interest rates continue to ease, and the uncertainty in financial markets stabilises. Growth in metropolitan Brisbane lot production is forecast to increase by 27% over the three years to 2011/12.

Demand for land on the Gold Coast rebounded in 2006/07 as land prices eased, having seen sharp declines in demand during 2004/05 and 2005/06 due to land prices more than doubling in the three years to 2003/04. However, the pick up in 2006/07 proved to be fragile as rising interest rates reversed the improvement in affordability, with new house approvals weakening by an estimated 11% in 2007/08. At the same time, new lot production is estimated by BIS Shrapnel to have fallen to its lowest level since 2001/02.

BIS Shrapnel notes that the decline in land activity has been overdone, with the significant decline in lot production in 2007/08 suggesting that land ‘on the ground’ has been absorbed, and that lot production will have to increase in 2008/09 to a level that will accommodate expected new house commencements.

In addition, high underlying demand and a deficiency of dwelling stock is to maintain increased demand pressure on the housing market on the Gold Coast, evident by the low vacancy rate. Consequently, BIS Shrapnel forecasts modest growth in both new house activity and lot production in 2008/09, particularly with a further reduction in interest rates expected in early 2009. More significant increases in activity are expected from 2009/10 as purchaser confidence returns to the market.

Sunshine Coast lot production was found by BIS Shrapnel to have weakened considerably since peaking in 2003/04, when land prices also peaked.
After a high of 3,700 lots in 2003/04, land production bottomed out at a low of 2,000 lots in 2006/07.

BIS Shrapnel notes that a key component of demand in the Sunshine Coast market is empty nesters aged 55 and over who are selling their existing homes and embarking on a sea change.

However, weak residential markets in the eastern states during 2004 to 2007 prevented this trade over in dwellings.

House prices and turnover improving in Brisbane and Melbourne in 2007 encouraged movement to the Sunshine Coast, with new house and lot production each increasing by an estimated 20% during 2007/08.

With signs that the residential markets in both Brisbane and Melbourne are slowing, and that Sydney will remain weak, growth in new house and land activity is expected by BIS Shrapnel to again weaken in 2008/09 on the Sunshine Coast.

Lot production is forecast to remain flat in 2008/09, before increasing steadily from the following year to peak at 3,300 lots in 2011/12, as stronger growth in residential prices in the eastern state capitals returns from 2009/10, which is to again encourage empty nesters to sell up and migrate to the Sunshine Coast.