2011 Housing Market Outlook

Author: Tim Lawless
Source: rpdata

2011 Market Outlook

Housing market conditions remained fairly subdued over the final quarter of 2010 with the combined capital housing market recording a virtually flat result.  Based on the RP Data – Rismark Home Value indices, capital city home values recorded a 0.4% increase over the three months to the end of December.

The soft market conditions recorded over the December quarter followed on from a weak September quarter where capital city home values were down by 0.1% and a slightly better June quarter where values were up by 0.8%.  Those results are in stark contrast to the results from 2009 and early 2010 where the quarterly growth rate was averaging 3.4%.

The slowdown in market conditions was brought about by a number of factors.  The most significant dampener on market conditions was higher interest rates.  The Reserve Bank of Australia embarked on an interest rate tightening cycle in October 2009, lifting rates by 175 basis points between October 2009 and November 2010.  Another factor that worked to slow market conditions was the wind back of the boost to the First Home Owners Grant which was halved in October 2009 and wound back entirely in January 2010.

Additionally, the general wind down in the market cycle was at play.  The high rates of capital growth between January 2009 and June 2010 could not have been sustained.  As interest rates rose, affordability constraints became a greater barrier and buyer demand began to fall.

The housing market in 2011 is likely to follow the trend recorded over the second half of last year.  We expect market conditions to remain reasonably flat and there is some likelihood of values falling modestly if we see further interest rate rises.

There are already a variety of indicators that suggest market conditions are turning back in favour of the buyer.  The average selling time for a home has increased from 39 days to 49 days over the last year.  The average level of vendor discounting has increased to 6.5%, up from 5.0% at the same time last year.  Auction clearance rates are averaging just 50% compared with about 70% at the same time last year.  These indicators all point to improved buying conditions for Australian consumers.  At the same time they suggest those home owners seeking to sell their home are likely to face some challenges.

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

The Australian labour force is at capacity, recording an unemployment rate of just 5.0% together with the highest workforce participation rate on record in January.  GDP growth is projected to rise above trend levels, with the Reserve Bank forecasting a 4.25% growth figure for the 2011 calendar year.

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.  Over the year to December rental rates have increased by 2.5% across the combined capital cities and it looks as though upwards pressure will be maintained due to low vacancy rates across the capital cities.  In all likelihood we will see rental growth move back to at least the historic average of between 6 and 8 percent 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 likely to provide a further encouragement for investors looking to strategically position themselves in the market.

In summary the Australian housing market is likely to remain reasonably steady over the coming year.  Factors such as higher interest rates and a recent deterioration of housing affordability will continue to dampen market conditions.  In balance, the Australian economy which is characterised by robust economic growth and a labour market at capacity which is likely to fuel wages growth, especially given the cutbacks to migration, will continue to underpin demand for housing both from a rental and purchase perspective.

 

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