We interviewed Dr Shane Oliver, AMP Capital’s Head of Investment Strategy and Economics and Chief Economist, to see what lies ahead for spring of 2017.
Q. How has the property market performed in the first half of the year?
The national property market has remained surprisingly solid so far this year, with strong average price gains year to date of around 6%.
However, this masks a huge variation between cities and states with strong gains in Sydney, Melbourne, Canberra and Hobart, only weak increases in Brisbane and Adelaide and price declines in Perth and Darwin, as the demise of the mining investment boom continues to have an impact.
Unit prices have also proved to be relatively resilient in Sydney and Melbourne, despite surging supply.
The strong average gains for the year so far have defied expectations and come despite interest rate hikes for investors and interest-only borrowers, along with tougher lending standards imposed by the banking regulator, APRA. However, there are some signs that these factors are starting to bite, as the auction clearance rate has decreased to around 65% in Sydney from closer to 80% earlier this year and lending to investors has also slowed.
Q. What is the outlook for property in spring and beyond in 2017?
Higher interest rates for some buyers, tougher lending standards, the rising supply of units and increasing uncertainty around the outlook for property prices mean we’ll probably see some slowing in property price gains in Sydney and Melbourne.
Unit prices are likely to be the most vulnerable as new supply hits.
By contrast, Canberra and Hobart are likely to continue to benefit as people in Sydney and Melbourne continue to look for more affordable housing, and this may start to have some positive impact on price growth in Brisbane and Perth too.
Property prices in Perth and Darwin are close to bottoming out after significant falls, as the slump in mining investment and its huge negative impact on employment in those cities is close to an end.
Q. What is the forecast for interest rates, and how will this impact the property market?
The RBA is expected to keep the official cash rate on hold until late 2018.
Solid business conditions, the end of the slump in mining investment and reasonable jobs growth are all against a further cut in interest rates. Soft consumer spending, a likely slowing in housing construction, record low wages growth, below trend inflation and a stronger Australian dollar are all factors against a hike.
Lenders may still raise rates for investors and interest-only borrowers, but only modestly, and rates for owner-occupiers with traditional loans are likely to remain steady. So overall, interest rates are unlikely to have much impact on the property market for the remainder of this year and into the first part of next.
Q. Is it better to buy a house or apartment in the current market?
Outside of Melbourne, Sydney and Brisbane it doesn’t make much difference, but in those cities there is a huge surge in the supply of apartments on the way and this is likely to result in weakening prices for apartments relative to houses, which are still facing undersupply.
Investors in areas of Melbourne, Sydney and Brisbane where there are lots of cranes around should look at houses. And it’s a good time for those looking to upsize from a unit to a house to act, before the supply of units really hits and pushes down unit prices relative to house prices. Downsizers looking to shift from a house to a unit may be best to wait for the unit supply surge to hit, which will likely result in lower unit prices and more options.
Q. Are there any regions or cities buyers should avoid or take advantage of?
If you can, now is probably a good time to avoid Sydney and Melbourne which have seen massive price gains over the last five years and are at risk of a period of weakness at some point in the next couple of years.
By contrast, better relative value can be found in Perth and Darwin after several years of price falls (and higher rental yields for investors). Regional Australian cities benefiting from strong growth prospects but which have lagged Sydney and Melbourne in home prices gains (and for investors still offer attractive rental yields) are also worth looking at.