High Rise
Sydney Morning Herald
Wednesday February 25, 2004
Mortgage rates of 10 per cent? Be worried - it could happen, reports John Collett.
Owner-occupiers don't have to worry about house prices falling over the next three years, but they could be facing mortgage rates of up to 10 per cent by June 2006, a leading property forecaster predicts.
Rob Mellor, BIS Shrapnel's director of building services and construction, said at a presentation in Sydney last week that house prices would not fall in any of Australia's capital cities over the next three years.
Fears that there would be a collapse in property prices were unfounded, he said. Instead, the most likely scenario was that house price growth would drop back to a level "more in line with inflation".
"I would suggest that there should not be fears that prices are suddenly going to weaken significantly," said Mellor. The fundamentals of both the economy and housing remained strong, he said.
But he expects inflation to move higher over the next three years, leading to higher interest rates. Standard variable mortgage rates could rise from current levels of 7 per cent to 10 per cent by mid 2006.
BIS Shrapnel's forecasts on interest and mortgage rates differ from those of most economists, who think that the standard variable mortgage rates could rise to 8 per cent by June 2006.
BIS Shrapnel's bearish sentiment on rates is based on its view that the growth of the Australian economy is likely to pick up speed, driven by improving export conditions, recovery from drought and steady growth in consumer spending. Also, the Australian economy will continue to be supported by the strength in housing construction. Mortgage rates of 10 per cent would probably stop house price
rises dead, said Mellor, or perhaps cause a fall in real prices; although what the effect of such a rise in interest rates would have on home owners with such large mortgages was uncharted territory.
"No one knows what the debt effect is," said Mellor, referring to the increase in the size of the average mortgage in recent years.
SYDNEY AND MELBOURNE
For Sydney and Melbourne, BIS Shrapnel forecasts growth in the median house price of 9 per cent over three years - considerably lower than the 20 per cent plus annual gains of recent years.
However, when this price growth is adjusted for inflation, the real rate of growth for Sydney and Melbourne will be zero (see table).
Mellor said Sydney's median house price of about $470,000 was "fully valued" rather than "overvalued". Any rise in interest rates hit Sydney the hardest, he said, because its home owners and investors had the biggest mortgages.
Investor activity in Sydney is expected to soften in response to high vacancy rates and weaker rental returns, and the two 0.25 per cent rises in interest rates late last year.
Melbourne's median house price of $368,000 is likely to move 9 per cent higher by mid-2006, or zero in real terms - that is, just keeping pace with inflation.
BIS Shrapnel expects that Victoria's outflows of people (mostly to Queensland) will pick up pace, decreasing demand for housing. Investors are experiencing high vacancy rates and high levels of construction will result in some oversupply, moderating house prices.
BRISBANE
The boom appeared to be over for Sydney and Melbourne, as evidenced by recent declines in building approvals and lower auction clearance rates; but in Brisbane (and south-east Queensland), the price boom was only about midway through, said Mellor.
For the two years to June last year, the median house price in Brisbane grew by 43 per cent. This was explained by Mellor as mostly a "catch up" from the second half of the '90s, when Brisbane prices, in real terms, hardly grew at all.
Mellor said a combination of "stock deficiency" and strong migration to the state from other parts of Australia would drive property prices higher. Brisbane's house prices should rise by 42 per cent in nominal terms and 30 per cent in real terms, according to BIS Shrapnel, while prices in Perth will match that growth.
TASMANIA
Tasmania will also continue to experience strong price rises. Mellor said that after years of losing people to other states, Tasmania had a net population inflow of almost 2000 in 2002-03. That may not seen like many, but in a state with only 400,000 people, that's a big lift in demand for housing.
Mellor speculated that perhaps some of the price rise in Tasmania was being driven by Melburnians buying holiday properties or second homes in the Apple Isle.
A WARNING FOR INVESTORS
While Mellor was dousing fears over house prices falling in the owner-occupied market - at least for the forecast period to June 2006 - he sounded a note of warning for would-be investors considering Melbourne and Sydney multi-story apartments.
He said that the investor market had gone "berserk", with the percentage of residential loans going to investors of 40 per cent. "We see these figures as a danger signal, highlighting an excessive focus on the residential sector amongst investors." Although, he pointed out, Australian Bureau of Statistics figures showed borrowing for both investors and owner-occupiers dropped 3.9 per cent in December last year.
Mellor said the investor market in Sydney and Melbourne was still something of a wild card and, if investors' demand for residential property remained strong, there "will be a major risk of a price correction coming through in two or three years' time ... when interest rates could be a lot higher".
Mellor said that he would not personally invest in Sydney and Melbourne
apartments now. He said many apartments were yielding only 2 to 3 per cent, and
investors were best advised to hold off going into property - even more so if
there's little prospect of capital gains.
FORECAST HOUSE PRICE GROWTH
Real* Nominal
Sydney 0% 9%
Melbourne 0% 9%
Brisbane 30% 42%
Adelaide 0% 9%
Perth 17% 28%
Hobart 18% 29%
Canberra 4% 14%
Darwin 9% 19%
JUNE `03 - JUNE `06
* MEDIAN PRICES AFTER INFLATION
SOURCE: BIS SHRAPNEL
© 2004 Sydney Morning Herald
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