22 Feb 2011

RP Data 2011 National Property Outlook

Australia’s housing market changed direction in July 2010 with capital growth grinding to a halt after 17 months of consecutive growth. Moving into 2011 it is likely that vendor expectations will need to adjust to the new market conditions. Homes are going to take longer to sell and buyers will be negotiating harder in 2011 than they were in 2009 and the first half of 2010.

Buyers’ market

Indicators now suggest that market conditions will continue to transition in favour of buyers. Both the average time it took to sell a house across the capital cities and the average level of vendor discounting increased from third quarter 2009 to third quarter 2010. These two factors provide the best indicator that buyers are becoming more empowered and vendors are losing some of their leverage in the market.

Despite the fact that the Australian housing market has moved out of the growth phase, this down turn is not likely to result in any material declines in home values as the base level fundamentals remain very strong.

Continued demand for housing

The good news is that Australia continues to record strong population growth. Overseas migration to Australia appears to have peaked, however total population growth remains well above average and the rate of population growth (1.8% per annum) is amongst the highest of any OECD nation.

Such a high rate of population growth will continue to create a high level of demand for Australian housing. Coupled with the fact that, as a nation, Australia is building too few dwellings, the undersupply of housing is not likely to be corrected any time soon despite the recent peak in population growth.

Strong economic conditions and consumer confidence are also likely to underpin the Australian housing market. The unemployment rate (at 5.1% in September 2010), is trending downwards towards ‘full’ employment and Australia’s economy is projected to grow by more than 3% during 2011. Both factors will be a strong influence on consumer confidence which is likely to remain high during 2011.

Rental growth

While capital growth is trending out of the housing market, rental rates are starting to show some upwards pressure. Weekly rents softened during 2009 as a large number of renters decided to take advantage of the historically low interest rates and Government incentives and purchase a home rather than rent. Since peaking in mid 2009, first home buyers have fallen back to about 15% of the overall owner/occupier market. The fall away in first time buyer numbers is now being reflected in increased rental demand, which in turn has caused an upward turn in rents once more.

Over 2011 it is likely that rental growth will at least move back to the historic average of 6% and 8% year on year. That’s great news for investors, but not so great for renters.

The improving rental market is also likely to see rental yields improving for investors. As capital gains outpaced rental markets in 2009 and the first half of 2010, rental yields were sharply eroded. We are now seeing the first signs of yield improvement which is anticipated to provide further encouragement for investors looking to strategically position themselves in the market.

Positive outlook

In summary, the Australian housing market is likely to remain reasonably steady over the coming year. Factors such as higher interest rates and housing affordability will continue to dampen market conditions.

In balance the Australian economy, which is characterised by robust economic growth and a labour market approaching capacity, will fuel wages growth and continue to underpin demand for housing both from a rental and purchase perspective.

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