Australian house prices continue to rise amid warnings of higher interest rates and a property downturn. What should property investors consider in 2017?
By Lachlan Colquhoun
Talking property in Australia is a little like talking sport. Everyone supports their own side.
In the Sydney market, if you are a homeowner, there’s nothing you enjoy more than reading about booming house prices. If you are a first homebuyer in the same market, you are hoping for a crash that makes property more affordable.
Away from Australia’s East Coast, homeowners and investors in Adelaide and Perth get frustrated watching stellar Sydney and Melbourne prices, and want some of the gain for themselves.
Why property prices could plunge
There is no shortage of opinions and predictions on which way the market will move in 2017.
Some are dire warnings about imminent collapse and a burst bubble, based around the perfect storm: mass defaults by apartment buyers, rising interest rates which force fire sales from people who have overleveraged on low rates, a faltering economy and a glut of new dwellings on the market.
At Deloitte Access Economics, partner Chris Richardson predicts Melbourne and Brisbane apartment market prices will drop by as much as 15 per cent by 2019.
Some market bears are less concerned. Economic forecaster BIS Shrapnel sees house prices falling nationally over the next three years, driven down by weaker investor demand and too many homes, while the Reserve Bank of Australia (RBA) has warned that oversupply could put the market under pressure.
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Property prices may continue to rise
Not everyone sees prices falling. At property analyst Louis Christopher’s SQM Research, the 2017 forecast is for gains of as much as 18 per cent in Sydney and 17 per cent in Melbourne if the RBA cuts official interest rates by another 0.25 per cent to 1.25 per cent by mid-2017.
At the National Australia Bank (NAB) there is a different view, which sits somewhere in between. NAB chief economist Alan Oster sees the long boom in Melbourne and Sydney coming to an end, and a 2017 revival of prices in Adelaide and in Brisbane, where there is more demand than supply.
The NAB, he says, forecasts that national house prices will increase by 1 per cent across the board in 2017 as the market holds its ground.
Oster does, however, see a two-speed market: established homes and apartments. Melbourne and Brisbane are both overbuilt with apartments and Perth also has a surfeit of supply.
He doesn’t see an apartment market apocalypse as foreign investors look elsewhere. Not this year anyway.
If there are to be any defaults, they will likely come in 2018 when many of the projects now being built are due for completion.
However, Oster is sanguine at this prospect. “The market would only collapse if there were mass defaults all around the same time,” he says. “I just don’t see that happening.”
Investors continue to borrow for property
An economic slowdown forecast to last through to 2018 will create the case for another RBA rate cut in the middle of next year, while the banks – which source about a third of their funds from offshore markets where rates are moving higher – will continue to ratchet up their mortgage rates, particularly for investment property.
Investors, however, don’t seem to be paying attention to the incremental increases in the price of borrowing. Australian Bureau of Statistics (ABS) figures from August 2016 show an unexpected 4.6 per cent rise in investment lending for real estate.
The bullish sentiment was backed up by the NAB Residential Property Index for the third quarter of 2016, where a survey of 240 property industry professionals forecast a national house price increase of 1.4 percent by 2018, driven by gains in Victoria and New South Wales.
The most recent ABS figures provide possibly the market benchmark for 2017. The September quarter results, released in mid-December 2016, show a national 3.5 per cent increase in residential property prices in eight capital cities, with Melbourne leading the charge with 6.9 per cent growth. Darwin, with minus 7.2 per cent, and Perth, with minus 4 per cent as the hangover from the mining boom continues, dragged the overall result lower.
As with all types of investment, profit will depend on the point at which you buy in. Buy at the top and the only way is down. If you buy at the bottom of the cycle there’s plenty of upside.
If you are in a property investment for the long term, then you can handle some volatility in a ride which might last decades rather than years.
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