This article is from the Australian Property Journal archive
THERE will be a small window of opportunity for new housing activity to pick up in 2011/12, before variable interest rates peak at 9.1% and wind back demand, according to BIS Shrapnel.
According to BIS Shrapnel’s Outlook for Residential Land, 2010 to 2015 report, a rising undersupply in most markets, more stable interest rates and strengthening economic conditions will see new house and land activity gain momentum from 2011/12.
However, BIS Shrapnel also warns the spectre of rising interest rates will eventually have an impact across all markets.
Author Angie Zigomanis said employment and income growth will overcome some of the initial rises and will continue to support new dwelling demand.
But inflationary pressures are subsequently expected to become more acute, with the variable rate moving past 8.5% to reach a forecast peak of 9.1% in 2012/13, which will have a negative impact on residential activity.
The warning comes as the International Monetary Fund said Australian house prices could be overvalued by up to 15%.
Meanwhile Zigomanis said the market is currently suffering a hangover from the expiry of the First Home Owner’s Grant Boost Scheme, sharp interest rate rises in 2009/10 and the lingering influence of the Global Financial Crisis.
“The current slowdown will represent only a slight pause in what is expected to be an extended upturn in demand for new housing.
“Sydney, Perth and South East Queensland are building new dwellings below the level required by population growth and the underlying dwelling deficiency is increasing in these centres. Although construction in Melbourne and Adelaide is at, or close to, record levels, the current underlying deficiency has not yet been fully eroded.
“These pressures, along with normalising first-home buyer and upgrader demand, will underpin the acceleration in demand for land through 2011,” he added.
Zigomanis said pent up demand and rising employment and income growth from recovering economic conditions should help confidence return after the recent interest rate rises.
“This will stimulate activity in housing markets and consequently land markets. Nevertheless, the upturn will vary nationally, depending on overall affordability in each market, and the level of pent up demand,” he added.
Sydney
BIs Shrapnel found lot production fell from a peak of nearly 9,000 lots in 1999/2000 to an average of around 1,700 lots per annum over 2005/06 and 2008/09 which is below the level in Adelaide and the smaller markets of the Gold Coast and Sunshine Coast. Production increased to just under 3,000 lots in 2009/10.
Lot production is forecast to rise to a peak of 7,200 lots by 2012/13 as outer Sydney accommodates much of the upturn in new house activity. But this remains below the 7,600 lots per annum average over the five years to 2001 and reflects the high cost of land.
Melbourne
Lot production in Melbourne’s outer suburbs peaked at 18,600 lots in 2008/09 and is estimated to have remained close to this level in 2009/10. Demand was driven by record levels of population growth and net migration, because Melbourne had more affordable land prices compared to other eastern state capitals.
BIS Shrapnel said with production already running at record levels, there is little scope for activity to increase further, despite the accelerating economic conditions.
Solid underlying demand, together with some lingering dwelling deficiency, will keep new lot activity high – at around 18,000 lots per annum – before higher interest rates in 2012/13 slow demand in the subsequent two years.
BIS Shrapnel also warned that some downside to these numbers could emerge if lot price growth becomes too strong and reduces the affordability of new housing.
Brisbane
Production weakened considerably since peaking during 2007 and 2008 due to affordability issues following strong price growth and weak economic conditions in Queensland. Coupled with weak employment growth and affordability issues, Brisbane saw interstate migration inflows slow sharply, curtailing demand.
BIS Shrapnel said any upturn in the Brisbane market is expected to lag, with the next round of big investment in resource projects not significantly contributing to the Queensland economy until 2011/12.
With continued weak activity expected in 2010/11, the low level of construction means the underlying deficiency of dwellings will rise. This will underpin a sharp rise in new dwelling and lot production over 2011/12 and 2012/13 as economic growth accelerates. Lot production in metropolitan Brisbane is forecast to rise from an estimated 8,500 lots in 2010/11 to a high of 12,300 lots by 2012/13, before peaking interest rates in 2012/13 slow activity in subsequent years.
Perth
Lot production peaked at 12,300 lots in 2005/06, but has since fallen significantly. Zigomanis said the land market was also left in oversupply after a 143% increase in the median house price and a 205% increase in the median land price from 2002 to 2007. Together with finance drying up for developers for new projects, production more than halved to less than 6,000 lots in 2008/09, and has stayed at a similar level in 2009/10.
However Zigomanis said the slump will be short lived with production poised to accelerate on the back of increased confidence due to a recovery in commodity prices and investment in the resource sector.
“Similar to the Sydney market, land prices in Perth also overshot the mark at their peak. However, in contrast to Sydney, where high government charges meant that developers could not reduce prices to ‘meet the market’, median land prices in outer Perth and Peel are now 13% below their peak, which has allowed new houses to be more affordably produced, assisting the upturn in new house and land demand.
“With the Perth market now in deficiency after three years of falling dwelling activity, the pent up demand will flow through to the new house and land market through to 2012/13. Although new house approvals are expected to show a marginal decline in 2010/11 due to the fall off in first-home buyer demand, there will nevertheless be an increase in lot production now that the excess supply is estimated to have been absorbed. Lot production in outer Perth and Peel is forecast to continue to rise through to a peak of 12,600 lots in 2012/13 – similar to the 2005/06 peak – as population and income growth in Perth is driven by the return to booming conditions in the resource sector,”
Gold Coast
Demand for land collapsed after a peak of 3,500 lots was recorded in 2006/07. The GFC also resulted in many local developers and financiers either collapsing or experiencing funding issues. As a result, lot production fell to 1,500 lots in 2008/09 and is estimated to have edged down further to 1,400 lots in 2009/10. This is the lowest level for at least the past 20 years.
BIS Shrapnel expects limited improvement in activity in 2010/11, with developers still affected by funding constraints.
However, the low level of new dwelling activity will underpin a rising deficiency of dwellings and is forecast to peak at 3,800 lots by 2012/13 – the highest level since 2003/04 – before rising interest rates reach a level sufficient to curtail the upturn and result in a slowdown form 2013/14.
Sunshine Coast
Production weakened from a high of 2,300 lots in 2007/08 – although even this peak was well below the previous high of 3,700 lots in 2003/04. The market weakened further in 2008/09 and 2009/10, still impacted by both weaker purchaser demand from reduced interstate migration, and the constraints on funding due to the GFC.
Growth in new housing activity and lot production is expected to be minimal in 2010/11, before rising more rapidly over the following two years. The recovery in the Queensland economy in this period should underpin greater residential turnover in Brisbane, while the residential upturn in Sydney is also expected to gain momentum. This will again encourage empty nesters to sell up and migrate to the Sunshine Coast, with lot production forecast to peak at 3,100 lots in 2013/14.
Adelaide
In line with the improvement in residential construction activity, lot production in outer Adelaide has increased from around 3,000 lots in 2004/05, to an average of nearly 4,000 lots per annum over 2008/09 and 2009/10.
Continued solid economic growth and underlying demand should maintain similar lot production levels through to 2012/13. The high level of dwelling activity that has been seen in recent years means the market is close to balance and BIS Shrapnel expects activity to begin to turn in 2012/13 as interest rates approach their forecast peak.
However should the peak in interest rates come through earlier, or land prices show a substantial increase beyond the moderate level expected, then the tip in the affordability equation could bring the downturn through earlier.
Australian Property Journal
