Australian Property Prices: Where They are Heading Through 2015

Finance documentsProperty investors would be forgiven for being confused about the outlook for property prices, especially in the short term.

Never before has opinion been so divided. Bloomberg View’s William Pesek recently wrote that rising unemployment, falling business expenditure, and global deflation pales into insignificance when compared to a property market gripped by “irrational exuberance beyond anything the U.S. experienced in the mid-2000s”.

Others, such as SQM Research’s Chief Executive are calling for property to rise by as much as 15% this year, with Sydney seeing the actual sold median house price above $1 million by the fourth quarter. APM Chief Economist, Andrew Wilson, believes we could be even closer to seeing this historic mark broken.

Fear of a fall is unfounded

The fear is that a fall in Australian property prices will have a wider detrimental economic effect, helping to destabilise the financial system and causing untold financial stress to households. Observers like William Pesek believe that the RBA has taken its eye off the ball. It has reduced interest rates to historic lows because of a flagging economy and sluggish resources market, without heed to a housing bubble, is the argument the gloom-and-doom forecasters pronounce.

The latest house price data points to the opposite. Nationally, house prices grew by 7.4% through the 12 months to March 2015. The only market that looks a little overheated might be Sydney, where prices rose by 13.9%. Melbourne saw a rise in median prices of 5.6%, and Brisbane’s property values increased by 2.7%. (Data from CoreLogic RP Data.)

This over-performance by Sydney is predicated on a number of factors including that Sydney:

  • is Australia’s largest city, and home to the country’s financial base;
  • boasts some of Australia’s best education facilities;
  • has some of the most iconic beaches in the world, and also some of its most secluded shoreline.
  • Prior to the latest cycle of price increases Sydney had 7 years of very little growth – so over the last 10 years Sydney property prices have only increased by an average 4.8% per annum.

Sydney is a magnet for foreign buyers and domestic demand alike. However, its property price ‘bubble’ – if, indeed, it should be described as such – is a ‘macroeconomic issue’ and won’t concern the RBA unduly according to Adam Boyton of Deutsche Bank, who believes that Australian interest rates will be cut at least once more this year.

Why interest rates may be cut again

There are a number of factors which give room, and cause, for interest rates to be reduced further through the remainder of 2015: iron ore and natural resource prices are collapsing, putting pressure on unemployment which is already at ten year highs; consumer confidence is weakening, as is business confidence in the headlights of a global economic slowdown; the Australian dollar is strong, which means exports are becoming uncompetitive in foreign markets; and though economic growth has been measured at 2.5%, this isn’t strong enough to reverse those unemployment numbers.

National house price growth remain constant, though with regional variations

The likelihood of further interest rate cuts will make mortgages more affordable, and help the property market by doing so. However, the growth in national average house prices may remain at around the same level as seen in 2014. This will be as a result of a slower advance in prices in Sydney (where prices may rise by ‘only’ around 8%, buoyed by a general undersupply and constant demand) but a pick up elsewhere.

While Sydney could still perform more strongly than the rest of the country, Brisbane’s real estate market should perform better after lagging Sydney and Melbourne for much of the recovery after the GFC. Melbourne property prices may perform at around the same rate of growth as 2014. Perth and Western Australia could be in for another difficult year, as the flagging iron ore price continues to weigh on regional sentiment.

Gain with a long-term property investment strategy

Whatever the outcome in property prices through 2015 ­ – and we would err on the side of being cautiously optimistic – a long-term investment strategy will serve investors well. Over the last 100 years, property prices have doubled every ten years. With continued strong growth in Australia’s population likely to see it almost double in the next thirty to forty years, there is no reason to doubt that the record of long-term property performance will be repeated in our current long-term investment lifetime: and that’s great news for property investors.