House price rises to ease in new year

It’s time to pull out the old crystal ball for what lies ahead for Sydney’s real estate in 2010. Mind you, house price forecasting these days is becoming darker than the darkest of arts.

Even so, our first prediction is that Sydney will record another 4 per cent-plus rise in house prices (as measured by the Australian Bureau of Statistics) for the December quarter. Present indications on housing finance, sales plus fewer listings suggest we are recording accelerated house price growth across Sydney.

This growth is likely to slow to about 2 per cent a quarter (on average) for 2010, due to a lack of first-home buyers and concern among investors about the direction of interest rates.

Due to the forecast house price gains next year there’s going to be increased building activity as developers will be able to build at a profit once again and access to finance will become easier for them.

The higher end of the market is likely to outperform the affordable end.

Those with the money have been increasingly entering into the market, snapping up heavily discounted properties over the $1.5million range. And as overall Sydney prices continue to rise, speculative activity will be the greatest at the top end.

Despite an upturn in building activity, vacancy rates at the affordable end of the market will remain tight and they will become tight again for the affluent part of the market as the economy continues to recover. However, don’t believe stories about asking rents rising 40 per cent-plus at the upper end. That is just not happening. I like to follow the official data from the NSW Department of Housing which has indicated rental growth being positive, but a more benign 3.9 per cent a year (Sydney-wide) and 2.2 per cent a year for the affluent inner ring, which I think is the true state of affairs. Next year, rents will probably grow slightly quicker at 5 to 6 per cent a year.

Of course, the key is going to be interest rates and just how far they will rise. At the moment the market is forecasting average home lending rates to be 7.25 per cent by June 2010. A month ago the market was factoring in a more aggressive 7.75 per cent, so expectations have eased a little.

I would not like to see lending rates at 8 per cent next year. Our modelling suggests that’s a level where many buyers (of all types) and existing home owners would not tolerate.

But if home loan lending rates stabilise below 7 per cent, investors will remain encouraged to enter the market.