When will the housing boom bust?

Friday 02 May 2014

In recent months, there has been plenty of talk of a housing boom in Australia. While some commentators think there’s plenty more left in this cycle before we run out of steam, others are warning that property prices are set to fall.

Who’s right?  To find out let’s do a Q&A.

What’s happening to house prices?

Combined capital city home values increased by 10.6% over the last year.  But growth around Australia has not been uniform as can be seen from the chart below, with Sydney (15.6%) and Melbourne (11.6%) being the primary drivers for capital gains over the year.

Why are prices rising?

One of the major drivers of this upswing is the effect of lower mortgage rates on housing affordability.

You see… despite what some claim, the current low interest rates have meant that despite home price growth, home loan repayments have fallen over the last few years, making homes more affordable thus pushing up prices even further.

Will dwelling prices keep rising?

The market’s momentum together with low interest rates, relative affordability, strong migration and rising household suggest house price growth will remain robust in our capital cities for the rest of the year.

But like all cycles, this one will eventually come to an end, most likely stopped by the same factor that put a halt to most previous property cycles – rising interest rates.

In past cycles a 20 per cent rise in the mortgage rate typically choked the property booms that were underway at the time. While the RBA recently suggested it will not raise interest rates for a while, if the property market keeps performing as strongly as it has, especially in Sydney and Melbourne, the RBA’s hand may be forced to respond.

In the meantime there are also some natural corrective mechanisms at work:

rising prices will slowly dent affordability and dampen interest from potential owner occupiers while at he same time reducing rental yields for property investors.

And as more supply comes on-stream with the completion of the many apartment blocks under construction vacancy rates will rise and rental growth will slow.

Is it too late to buy into this cycle?

Definitely not, but it’s important to buy selectively.

Sydney is likely to continue to outperform this year given that it is still making up for a long period (2003-2008) of minimal price growth. Robust auction clearance result and relatively low construction levels suggest strong growth in property values for the rest of this year, slowing to lower levels of growth in 2015.

Melbourne’s price growth surprised most commentators last year but the rate of growth in 2014 should slow to single digit levels in 2014 and 2015, supported by overseas migration and foreign investor demand.  However investors should be very wary of the looming oversupply of new CBD and near city apartments.

Brisbane, one of the laggards this cycle, should improve in part driven due to the large affordability differential which could cause increased interstate migration from southern states.

Perth seems fairly advanced in this property cycle, but mid-single-digit house price growth is expected this year.

 

 

Read more here: http://propertyupdate.com.au/will-housing-boom-bust/

- Michael Yardney