12 Oct 2010

Mortgage Interest Rates and Australian Property Market Outlook

Undeterred by rising mortgage interest rates Australians are still heavily focused on purchasing property, says independent market analyst Datamonitor basing its assessment on a recently conducted study.

“Consumer confidence in the Australian property market has rebounded after the tremulous last year,” says Datamonitor’s financial services analyst, Petter Ingemarsson.

Datamonitor, in it’s latest report, finds that 7 per cent of Australians will buy their first home and 8 per cent intend to purchase an investment property in the next 12 months.

Ken Raiss director of accounting firm specialising in property investment, Chan & Naylor, helps clients identify the latest property trends and take advantage of opportunities to kickstart wealth creation in the investment property market.

Raiss says that while “property investors are taking a more cautious approach in the current climate” they are “increasingly looking at structuring their portfolios with a view to asset protection and being able to transfer wealth”.

“SMSFs are of increasing interest to investors as vehicles to expand their property portfolios as they come with the benefit of asset protection and the ability to borrow.

“We find we are increasingly dealing with more educated consumers, who are seeking out as much information as possible prior to committing to the purchase of property.

“There are tentative signs that the wholesale lending market is relaxing LVR requirements, meaning there will be a larger pool of prospective investors, but the lending environment is still closely tied with global economic considerations.”

Raiss notes that, cashed-up buyers will be the real winners taking advantage of market volatility.

The recent Datamonitor survey shows first home buyer intentions exceeded expectations despite record-low housing affordability due to steadily rising property prices and home loan interest rates.

The survey reveals that 7 per cent of respondents were looking to buy their first home within a year, an increase from 6 per cent in 2009. This result contradicts most forecasts which expected first home buyer activity to be stagnant this year as mortgage lenders report a decline in borrowing from first home buyers.

“The strong first-time buyer demand in the survey is largely driven by confidence in property prices,” says Datamonitor’s Petter Ingemarsson.

“The residential property market weathered the storm of the financial crisis without a major price correction, contributing to the current strong consumer confidence.”

In the last 12 months consumers who thought property prices were very or quite like to fall dropped from 58 percent to just 20 percent.

Australians intending to purchase an investment property also increased, with 8 per cent of consumers indicating that they intend to purchase an investment property in the next 12 months. This is up from 5 per cent of respondents in 2009. Potential property investors fail to be deterred by the prospect of increasing mortgage interest rates. Only 2 per cent of respondents noted falling interest rates over the next 12 months as very likely.

“The prospect of capital gains drives property investor intentions, with rent income a secondary consideration,” says Ingemarsson.

However in an interview with the Herald Sun global consultants Datamonitor cautions that a “price correction” is a definite possibility as a result of dwindling housing affordability.

The study found that housing undersupply, which has reached a critical level in some areas of Australia, has steadily declined over the last decade and is set to deteriorate further.

The Herald Sun quotes Datamonitor saying that while an “eventual correction of prices” is likely in the housing market, the short-term outlook is upbeat and only a small number of people expect prices to fall over the next year.

“Given that house price growth has outstripped wage growth significantly over the last decades, this would have to entail either a significant fall in property prices or a sustained period of stagnant property prices,” Datamonitor concludes.

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