Fewer first time buyers and increasing interest rates will result in slower residential property price growth in Australia in 2010, according to economic forecasters. But residential prices will not fall and rents are expected to continue rising because of a lack of supply, according to the Residential Property Prospects Report 2010 to 2013 from BIS Shrapnel.
Senior project manager Angie Zigomanis said first time buyer activity has dropped after the expiry of the first home owner’s grant boost at the end of 2009 and affordability has also suffered as interest rates rise so recent levels of price growth cannot be maintained.
Investors will replace some of the demand lost as a result of those factors, meaning house prices will continue to grow, the report says. The more stable interest rate environment is expected to underpin purchaser confidence as economic conditions continue to strengthen and should continue to push through moderate house prices rises, Zigomanis said.
Sydney and Perth are expected to post the strongest growth in house prices in the coming years while weaker demand and local economic conditions are expected to lead to more moderate price growth in Brisbane, Hobart and Canberra.
Melbourne and Darwin have already experienced very strong price rises and low affordability will limit further rises, BIS says in the report. A shortage of rental properties will keep pressure on rents, it adds.
But the market is in a precarious position and it is only a matter of time before it crashes, according to legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham.
Grantham famously predicted before the global financial crisis that at least one major bank would fail and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will simply cease to exist.
Now he claims that Australia has an unmistakable housing bubble and that prices need to come down by 42% to return to the long term trend. In Australia to meet with GMO clients in Sydney and Melbourne, he described the real estate market as ‘a timebomb’ just waiting for interest rates to increase and become impossible to support. Since last October, the Reserve Bank has raised the official cash rate six times and it is currently 4.5%.
But the Reserve Bank of Australia downplayed concerns over a house price bubble. Speaking at a business function in Sydney, RBA deputy governor Ric Battellino said property prices in Australia, relative to income, were reasonable.
‘People feel that house prices in Australia are quite high and that’s quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities and they are quite elevated,’ Battellino said.
‘But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries,’ he added.
