House prices could fall by 10% when home owner’s grants wind back

Residential property prices could fall by as much as 10% once the Federal Government’s enlarged First Home Owner’s Grant is reduced from October, property research firm CB Richard Ellis claims.

CBRE manager of residential research Erin Rolandsen says that figures from the Australian Bureau of Statistics show the number of dwellings bought by owner-occupiers in May was 29% higher than October, and first home owner’s were responsible for 95.2% of that increase.

“Now this particularly may happen in some areas more than others, it depends on how much influence first home owners’ have had in the market. With the tightening of lending conditions at the moment, buyers have started to drop off.”

“What will really confirm this is when the boosts end, seeing as first home buyers have driven 95% of the increase in demand. It’s a of a bit concern as to what’s going to happen, and some of those price drops could be up to as much as 10%.”

Treasurer Wayne Swan announced the extended grants would be lowered from September, and discontinued after December.

The forecast, which is based on analysis from the firm’s ViewPoint report, says the $7,000 grant for existing homes and $14,000 for new homes have been virtually negated by average housing price increases of $20,000.

But head of property research at Advisor Edge, Louis Christopher, says the drop off in first home owners could be replaced by an increase in investor activity.

“There is a risk that the lower end of the market could underperform once we see the phasing out of the boosts, going back to its original levels. But we are seeing the return of investors in the market, which wasn’t there three months ago. ABS housing and finance data show this, and funnily enough, show the number of first home buyers is starting to peak.”

“There is a chance that if investors come into the market, it is quite possible that we will not see an imminent decline in affordable housing, but much is dependent on investor activity, so we’re watching that very, very closely. There is a risk, but the market has changed and the level of investor activity has changed. If that is sustained, it’s quite unlikely to fall by those levels.”

While Rolandsen says the return of investors into the market is a “possibility”, she argues various surveys measuring investor confidence are a bit “bi-directional”.
“I do get the impression that investors are waiting, possibly because they are waiting to see that price drop when the first home owner’s drop out of the market. It’s just very hard to interpret what will happen next, a lot of this depends on unemployment and whether economic indicators from the US will dampen activity here.”

Meanwhile, other figures from CB Richard Ellis show that private investors and syndicators were responsible for over two-thirds of all commercial property sales in the first half of the year.

The figures show that $2.4 billion worth of commercial property valued at $5 million or more was sold in the first six months of 2009, representing a 45% decline in sales volume from the first half of 2008. About 47% purchases were made by private investors and 14% made by syndicators.

The biggest purchase by a private investor was the Industry House office in Canberra, sold for $123 million.

The figures also show that foreign investors accounted for 12% of all activity in the commercial property market, with the largest foreign deal the $167 million sale of an office tower on Melbourne’s William Street.

David Green-Morgan, research director at DTZ Research, says the increase in foreign investment is important because it shows foreigners view the Australian economy has relatively strong.

“Offshore groups are looking at Australia. With that GDP figure for the first quarter showing positive growth, I think that’s really stimulated the offshore groups into seeing the recession in Australia won’t be as bad as they first thought. They’re looking at us as one of the countries to be the first to recover from the downturn.”

“I think there’s still a way to go before we’re out of the woods, so probably the more important question is where is employment going to peak? Especially in the office market, commercial property goes alongside unemployment. As it rises, demand for office space continues to be weak.”