Can property prices keep rising?

With property prices in many capital cities hitting new highs, people are once again asking: “can property values keep rising? Have properties become unaffordable?”

The latest statistics from RP Data confirm that property prices across the nation have risen by an average of 9.8% so far this year, with apartments rising in price marginally more than houses.

Melbourne was the star performer delivering average gains of almost 15%. The Sydney market is finally moving and has seen prices climb almost 10% in the first 10 months of this year. Over the same period Darwin property values increased 12.7%, in Canberra prices rose 11% percent and in Brisbane, Perth and Adelaide average prices added 6.9%, 6.1% and 4.6% respectively.

These gains are despite us starting the year in the doldrums with the threat of a recession hanging over our heads and then two interest rate rises.

We’re told that we have record population growth and a shortage of dwellings because we’re not building enough houses, and this is pushing up property prices.

So can property prices keep rising and do we really have a shortage of dwellings?

Well…yes and no. Like most things, it depends.

You see, there’s not one housing market so it’s impossible to make a blanket statement about whether we have a housing shortage or not and whether property values can keep increasing.

Like most things in property it’s all about supply and demand. While many first home buyers are looking to set up a family in the new outer suburbs, a good proportion of them want to buy apartments in the “aspirational” inner suburbs of our capital cities close to their work and entertainment. This also happens to be the same market where many investors are looking.

At the same time established homeowners are looking to upgrade their homes in these inner and middle ring suburbs.

With more buyers wanting the same type of properties in the same suburbs, yet fewer properties on the market than a year ago, we have a shortage of supply in the locations where people most want to live… and this means property prices will keep increasing.

With very little construction of medium and high-density dwellings (apartments and townhouses) this shortage of properties to buy or rent is unlikely to change for some time. Currently banks are reluctant to lend to developers, and when they eventually do turn on the taps, there will be a lag of a number of years before new developments are completed. And these new developments will have come on stream at considerably higher prices than currently achieved to allow the developers to make the kind of margins that banks will want to see.

While there may be a surplus of CBD apartments in those new high rise towers, in general these cater for investors and over 80% are inhabited by tenants. Few homebuyers are keen on living in the centre of the city, so the many high-rise towers developers on the drawing boards are unlikely to change the groundswell of unmet demand from homebuyers who will head for the suburbs.

Yes property values will keep increasing in these inner and middle ring suburbs.

However, there’s no shortage of housing in the outer suburbs of our major capital cities where builders are busy building new houses. There is also lots of land, resulting in subdued price growth.

Similarly in many regional and rural areas, demand is low and housing is plentiful, meaning there will be only modest price growth.

So is there a housing shortage? Yes in some areas and no in others.

Will property values keep increasing? Yes, but significantly more in some suburbs than others. As home owners and investors (and tenants for that matter) head for the inner and middle suburbs, areas where the land is already built out, yet which offer proximity to workplaces, schools, public transport, shopping and entertainment facilities rents and property values will keep increasing.

What about affordability? There will always be cheap properties around – just look in the outer suburbs or regional or rural Australia. The problem is most people just don’t want to live there.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.