The Australian property market outlook with Shane Oliver

Find out what's happening in the property market from AMP Capital Chief Economist, Shane Oliver.

Q: At the end of last year, you stated that Australian residential property has had a good year, but mainly due to house price gains in Sydney and Melbourne. So, now that we are in the first quarter of 2016, has anything changed? How do you think the property market will pan out for the rest of the year?

A: The property market hasn’t changed dramatically so far. In the second half of last year, the Australian Prudential Regulatory Authority (APRA) measures designed to slow down bank lending resulted in the property investment market taking a bit of a hit. As a result, we saw very low auction clearance rates in Sydney and, to a lesser degree, in Melbourne.

Despite this hit, the property market is still holding up reasonably well – even though it’s not as strong as it was a year ago, at least in Sydney and Melbourne.

Some people think there will be a crash or a sharp fall in property prices. However, this would probably require a sharp rise in interest rates or a recession, both of which are unlikely.

Q: The share markets have had a rough start to the year. What impact will that have on the property market?

A: The one negative is the global outlook, with share markets being quite volatile lately. This has left the property market a bit vulnerable to scares, such as those reported in the local media lately about a property crash.

My view is that Sydney and Melbourne are going to be a lot calmer in 2016. But, in the absence of a Reserve Bank interest rate hike, or a lurch into recession in the Australian economy, it’s hard to see a sharp fall in prices coming.

Q: How do you see the following areas being affected in 2016?

A: Housing construction: New building approval numbers are slowing down, albeit, from record levels. Construction cycles run a course and when the market shows signs of indigestion, and price momentum starts to slow, the property construction cycle also starts to slow. With approvals peaking, expect construction activity to start slowing in 2017-18 and with it the supply of new property to the market.

House prices: Prices are likely to continue to rise but at a more moderate rate of say 5% instead of 11% for Sydney and Melbourne. But in other cities, such as Perth and Darwin, which have been affected by the mining boom downturn, property prices are falling by around 3.5 to 4% and are expected to continue at this rate. In Hobart and Adelaide, prices are down slightly, and Canberra has experienced moderate growth. Watch out for Brisbane, the Gold Coast and the Sunshine coast which are expected to pick up their rate of growth this year.

Q: What about interest rates, do you think will they stay down?

A: The Reserve Bank is keeping interest rates on hold at the moment but I expect that they will go down at some point. The key is that they are not going up.

Economic growth in Australia is still running at a sub-par 2.5% (normally around 3%). It could be a lot worse, considering we have just seen the end of the biggest mining boom in the history of the country.

Unemployment is not rising but it is higher than normal, so the Reserve Bank is leaving things as they are for now.

Q: Finally, in your opinion, what is the property market outlook for this year?

A: For renters: Rental yields are around 3% for houses and 4% for apartments and rental growth is modest. So if you were wondering whether to rent or buy, you might consider renting for a while as it is relatively cheap versus buying in many cities.

For buyers: There’s no incentive to rush out and buy now, particularly in Sydney and Melbourne, as their property markets are likely to cool. In Perth and other cities, it’s probably best to hold off on buying property for now as prices face more downside.

For sellers: It’s probably not a bad time to sell in Sydney and Melbourne as prices have seen dramatic gains over the last three years.

For first home buyers: Affordability is still poor, but at least the APRA measures have had the effect of calming down investor interest in property. The market is not as overheated as it was a year ago, so there’s less competition for buying properties. But it also depends on where you buy – Perth and Darwin might have some good opportunities because prices are falling.

For property investors: If Labor wins the next election, they have said that negative gearing will end, except for the purchase of new homes, from July 2017. But the negative gearing benefits for existing property investments will continue.

The Coalition might propose a policy which reduces the benefits you can claim under negative gearing. So it will come down to how the Australian population votes.

Investors might be inclined to buy older properties now to get in ahead of any potential changes to negative gearing from July 2017 under Labor. This could increase the demand for investment properties in the near term.

But bear in mind that the market for existing property may change from July next year under a Labor Government if changes to negative gearing cause investor demand to recede, potentially putting downwards pressure on prices.

 

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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.


This document, unless otherwise specified, is current at 9 March 2016 and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after that date. Past performance is not a reliable indicator of future performance.