An oversupply of new homes, weaker investor demand and lower population growth will see prices decline in most capital cities over the next three years, a new report shows.
Leading the expected price falls are Adelaide and Darwin, where the house median is forecast to fall by 2 per cent by June 2019, according to BIS Shrapnel’s Residential Property Prospects 2016 to 2019 report released on Monday.
While Sydney and Melbourne have been the engine rooms for price growth, median house prices in those major capital cities and Perth are expected to drop 1 per cent over the next three years.
All states except New South Wales are expected to move into oversupply or face growing oversupply.
BIS Shrapnel anticipates a record 220,000 new dwellings started construction in 2015-16, translating to a peak in new completions this financial year.
A record 49 per cent are expected to be multi-unit dwellings, with many larger apartment projects – with longer construction time frames – set to lead to a high volume of completions in 2017-18.
All states except NSW are expected to move into oversupply or face growing oversupply.
Prices growth in Melbourne has moved from the inner and middle-ring suburbs to the outer suburbs. Photo: Darrian Traynor
The research house’s senior manager, Angie Zigomanis, said investor demand was a key driver of demand in the Sydney and Melbourne markets, but moves by the Australian Prudential Regulatory Authority to curb lending had slowed investor activity.
“Nearly all capital cities are building apartments at record rates on the back of the recent strength in investor demand,” Mr Zigomanis said. “As these projects are progressively completed, it is likely that there will not be enough tenants in a number of cities to support rents and consequently values upon completion.”
Young couples in the rental market – who may be considering buying their first home – may delay their decision to buy a house if their landlord gave them a discount, he added.
Brisbane’s housing market is still relatively affordable and in undersupply.
With expectations of capital gains reduced, Mr Zigomanis said investor demand was expected to weaken further and create more downward pressure on prices.
After accounting for inflation, median house and unit prices in all capital city markets are forecast to be lower in real terms by 2019.
St George Bank senior economist Hans Kunnen said demand would still grow, but less than what it might have been over the past two years – yet supply was still strong.
There is still a significant pipeline of apartment construction to come through in Canberra. Photo: Supplied
Other than slower population growth and lower yield, Mr Kunnen said there was a possibility that foreign demand – particularly from China – could be constrained.
“Like BIS Shrapnel, I wouldn’t expect it to be drastic, but the forces that pushed [prices] up now appear to be plateauing,” he said.
“When you then have supply increasing, the potential is there for slightly lower prices. But, that is in three years’ time.
Given the falls over the past two years in Perth, the rate of decline is likely to slow. Photo: Daniel Carson
“We know in Sydney and Melbourne, demand is still very strong – and in Sydney in particular – supply has yet to catch up with demand.”
HSBC chief economist Paul Bloxham believed there would be low, single-digit house price growth over this year and into 2017.
“We think the housing boom is over, we think the housing market will cool … and we think you may see apartment prices fall in some of the markets where it looks as though it’s oversupplied, like Brisbane and Melbourne,” he said.
“Our forecast for next year is national house price growth is somewhere between 0 and 5 per cent.”
Domain Group chief economist Andrew Wilson said the market was in for a period of a flatness, a product of a low-growth economy and low interest rates.
He expects house prices to grow between 2 and 5 per cent in most capital cities over 2016.
The two catalysts for falling house prices would be higher interest rates or a sharply declining economy, he said.
“Our economy is just running out of steam rather than sharply declining, and interest rates are going anywhere but up,” he said.
“It’s not out of the question that we will have interest rates below 1 per cent over the next year or two. There’s no realistic case for higher interest rates that would push prices down.”
BIS Shrapnel’s state-by-state forecast:
Home buyer activity and prices growth have moved from the higher-value inner and middle-ring suburbs to the outer suburbs.
New dwelling construction – particularly apartments – continue to rise, but in particular inner-city pockets and the CBD, rather than across the city.
Median house prices are forecast to fall by 1 per cent by June 2019 – after a minimal 2 per cent rise in 2016-17 and a three per cent fall in the following two years.
Emerging oversupply means the median unit price is expected to fall by 8 per cent in the three years.
Price growth slowed in the past financial year after three years of strong price rises driven by investors. Minimal growth is expected in this financial year.
A growing number of dwelling completions would alleviate some pent-up demand in the market, Mr Zigomanis said, and slow price growth would also discourage investors.
After growing a further 2 per cent this financial year, BIS Shrapnel predict the median house price will fall 3 per cent over 2017-18 and 2018-19. As a result, the median house price in June 2019 will be 1 per cent lower than today’s level.
The median unit price is forecast to fall 5 per cent by June 2019.
The best prospects for house price growth over the next three years are Brisbane and Hobart, where the median is predicted to rise 7 per cent by June 2019. The median unit price in Brisbane is forecast to fall by 6 per cent.
New apartment construction was booming – particularly in inner Brisbane – and the apartment sector was expected to move into oversupply, Mr Zigomanis said.
However, some prices growth is expected for houses because it is relatively affordable and is in undersupply.
The outlook for Canberra is also relatively rosy, with its median house price forecast to grow 6 per cent over the coming three years.
Mr Zigomanis said there was still a significant pipeline of apartment construction to come through and would continue to dampen the market.
The median unit price dropped 4 per cent in 2015-16 and is forecast to drop another 4 per cent over the next three years.
The market continues to weaken because of declines in the resource sector, impacting employment and population growth.
The median house price is estimated to have declined by 8 per cent in the two years to June 2016.
Given the falls, the median house price is predicted to drop by 1 per cent by June 2019. The median unit price is forecast to fall 5 per cent.