Real estate prices are expected to deteriorate across the nation, driven by an apartment oversupply, lower population growth and weakened investor demand, with two markets in particular facing the greatest risk.
Released earlier this week, BIS Shrapnel’s Residential Property Prospects 2016 to 2019 report predicted that a combination of lower population growth and increased dwelling completions will see most undersupplied markets tip into oversupply in 2016 and 2017, while excess stock in other markets is likely to persist.
“Although interest rates are expected to remain low, and even potentially fall further, the adverse demand/supply balance is likely to dampen price growth, with median house and unit prices in all capital city markets forecast to be lower in real terms by 2019,” according to the report.
BIS Shrapnel senior manager and study author Angie Zigomanis said the rate of price growth in Sydney and Melbourne has slowed in 2015/16.
“Investor demand has been a key driver of the upturn in both markets, and moves by the regulator to slow growth in bank lending to investors have seen investors retreat,” he said.
“At the same time, dwelling completions are rising to record levels and the increasing supply/demand imbalance will dampen price growth. In particular, the boom in apartment construction over the last couple of years is creating a disconnect in the supply balance between detached houses and units, with a resulting difference in their price outlook.
“In fact, nearly all capital cities are building apartments at record rates on the back of the recent strength in investor demand,” said Mr Zigomanis.
“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,” he said.
The report noted that national population growth in 2014/15 was at its second-lowest level since 2005/06, with net overseas migration falling from 229,400 persons in 2011/12 to 176,500 persons in 2014/15 – although there have been wide variations across the states.
“Nevertheless, with the majority of net overseas migration classified as ‘long term overseas visitors’ – that is, temporary but not permanent arrivals – this reduction is likely to be impacting most on the rental, and therefore apartment, sector,” it said.
Nationally, BIS Shrapnel anticipates a record 220,000 new dwellings have been commenced in 2015/16, and this will translate to a peak in new dwelling completions in 2016/17. A record 49 per cent are expected to be multi-unit dwellings, with many being larger apartment buildings with longer construction time frames, which will translate to further strong completions in 2017/18.
“Total dwelling construction compares with an average underlying demand for 159,200 new dwellings per annum over the next five years. As these dwellings reach completion, all states with the exception of New South Wales will have moved into oversupply, or be experiencing an increasing oversupply,” according to the report.
With the price pressure of the stock deficiency of recent years being steadily alleviated, BIS Shrapnel expects all markets to steadily weaken and bottom out over 2017/18 and 2018/19, with house prices largely flat or in decline over this period.
A further headwind to the residential markets is the regulatory guidelines initiated by APRA in 2015. The resultant tighter bank lending policy targeted at investors has seen investor activity weaken across all states.
Mr Zigomanis said that in NSW and Victoria in particular, where the strength of investor demand has been a key driver of the Sydney and Melbourne residential markets respectively, the decline in investor activity has slowed the pace of price growth.
“As investor expectations of capital gains are reduced, investor demand is expected to weaken further, creating additional downward pressure on prices,” he said.
BIS Shrapnel says all markets are forecast to experience falls in prices in real terms by June 2019.
Further weakness is forecast in the Perth, Darwin and Adelaide markets, with the report predicting that the Perth and Darwin markets will continue to be impacted by falling resource sector investment, weak population growth and excess supply. Meanwhile, Adelaide is expected to continue to face economic headwinds, and the closure of car manufacturing in 2017 will be a further drag on the local economy and, in turn, on prices.
“The real decline is forecast to be minimal at one per cent in Brisbane and Hobart, and as high as 12 per cent in Adelaide,” the report said.
“Across the unit market, all capital cities are expected to experience greater real declines in unit prices ranging from eight per cent to 15 per cent over the three years to June 2019. With overseas buyers only able to purchase new apartments, the resale market will be more limited, being confined to local buyers.”
BIS Shrapnel forecasts the best prospects for median house price growth over the next three years in the Brisbane and Hobart markets, followed by Canberra.