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Property weakness short-lived: ANZ
Released 18 January 2011

Property prices will weaken in 2011 but the decline will be short-lived, according to a report by ANZ Senior Economist Ange Montalt. 

“It appears a broadly-based expectation that significant prices rises will be difficult,” said Montalt. “This mentality is reminiscent of the experience over the first half of the 1990s. However, there are a number of reasons why this perception will be short-lived.”

Firstly, Montalt said the economy is on a healthy trajectory and is expected to grow around trend over 2011 and 2012.

“Investment expectations are favourable and the terms of trade will sustain incomes growth over the medium-term despite an expected peak in 2011/12.

“Secondly, fundamental conditions in the housing market are tight and likely to tighten further in the years ahead, manifesting initially in lower rental vacancy rates and eventually higher rentals growth.”

Montalt believes this acceleration in rental growth will be symptomatic of the broader structural shortage and will serve to re-calibrate yields and will offer a clear signal to investors that pre-conditions for improved housing market conditions are establishing.

“Higher interest rates in the year ahead will be a catalyst for this, diverting potential buyers to rental markets, a process that had already commenced through 2007 until the GFC and associated policy changes including lower interest rates, FIRB relaxation and renewed higher assistance to first-time buyers, circumvented the adjustment.

“The recent slowing in population growth, if it continues, however, does threaten to delay this process and hence the seeds of a renewed rental boom and house price recovery.”

Montalt believes sentiment towards the housing market, while expected to remain subdued over 2011 will be supported to a considerable degree by a relatively benign economic backdrop, despite the cloud of further interest rate rises and the potential ‘drag’ on rental market adjustment from lower net migration.

“The transitory forces are delicately poised, but in the absence of a rapid escalation in interest rates to combat unwelcome higher ‘core’ inflation, a wholesale downward shift in house prices remains unlikely.”