Things may get worse before they get better, but get better they definitely will, according to the Real Estate Institute of Australia's annual publication on the state of the market.
The REIA's 2007 Real Estate Market Outlook predicts that a continued softening of the residential sales market in the Eastern States, and rental increases in response to tight vacancy rates, will ultimately lead to improved residential investor yield.
This in turn is expected to create new interest to re-stimulate the market and values, the report suggests.
Here is an overview of topics covered in the report.
Residential property prices
During 2006, house prices rose across Australia, ranging from 0.6 per cent in Sydney to 38.7 per cent in Perth. Demand for housing finance weakened sharply in the second half of 2006, in response to interest rate rises and deteriorating home loan affordability. A slowing in demand for property, despite positive population growth in all States and Territories during 2006, will limit price growth in 2007.
Current evidence suggests that Sydney and Adelaide prices will likely remain flat into 2007. The more moderate growth in Melbourne, Brisbane, Canberra and Hobart during 2006 has already begun to slow in all cities except Hobart, and it is likely that price growth in these cities will also be more subdued in 2007. Strong interstate migration to Queensland along with strong commodities prices may assist in maintaining positive price growth, particularly in South-East Queensland.
Perth and Darwin had an outstanding year for median house price growth in 2006, although there is evidence that the boom times of 2006 are slowing in Perth.
However, net overseas migration to Western Australia is high, and the unemployment rate is low (3.1 per cent), which will assist in maintaining stronger demand than in other parts of the country. Darwin continues to have strong prospects for price growth into 2007, in response to the commodities boom and high demand for quality contemporary property.
Real estate sales activity
The two year slowdown in residential building activity in the Eastern States will result in reduced availability of housing stock for sale or rent during 2007.
In contrast with the Eastern States, dwelling construction in Western Australia increased during 2005/06 in response to strong demand driven by the housing boom. This will slow in 2007, in response to skilled labour shortages and higher interest rates. There is some evidence that demand is cooling in the WA market.
Rental market
The demand for rental properties is outstripping supply in every capital city in Australia, with a weighted Australian average vacancy rate of 1.7 per cent, well below the industry vacancy rate benchmark of 3.0 per cent. This is not likely to improve in the short term, based on falls in investor financing in the second half of 2006.
Rents increased by an average of 9.8 per cent over the year to September 2006, significantly above the CPI increase of 3.9 per cent and the increase in median weekly family income of 2.7 per cent. They are likely to continue to rise across the country during 2007, particularly in Sydney which has been slower to respond to the tight vacancy rates than other locations.
Home loan affordability
Australian families required 33.8 per cent of family income to pay an average home loan in September 2006, the worst result for 25 years aside from an 18 month period from March 1989 to September 1990.
First home buyers have been most affected by the deteriorating affordability and the increase in interest rates, with the share of all dwellings financed by first home buyers at 17.4 per cent in September, compared with an historic average of 21.8%.
Property investment
A tight rental market is an attractive proposition for property investors who intend to make quality long-term investments and are not seeking short-term capital growth.
The 2007 property market is likely to offer significant opportunities for long-term investors, particularly in locations where prices are moving downwards, e.g. Sydney.
REIA data shows that the average annual return on property investment over the past two decades has ranged between 12.0 per cent for other dwellings and 14.1 per cent for houses in Sydney; to 17.1 per cent for Perth houses and 17.2 per cent for other dwellings in Perth and Hobart.
