Will property prices keep moving sideways? A SmartCompany Q&A

The latest Australian Bureau of Statistics figures show capital city house prices rose just 0.1% in the September quarter, with prices actually falling in Sydney (down -0.9%), Brisbane (-2.1%), Adelaide (-1.4%), Hobart (-1.4%) and Canberra (-0.4%).

The data, which largely supports similar data from Residex and RP Data and Australian Property Monitors, suggests the housing market is cooling, after fears earlier this year that residential property was becoming badly overheated.

But while experts are in agreement that less heat in housing is no bad thing, there are mixed views on when house prices could start rising again.

Are we in for a few years of stagnation, or will growth resume in 2011 as the economy starts to pick up?

Time for a quick SmartCompany Q&A.

So give me an idea of where house prices actually sit right now?

OK. The best index to use comes from RP Data and Residex – the RBA likes it and it includes non-metro areas.

The latest figures released late last week show the national median price in Australian capitals increased just 0.1% during the month of September (so essentially, no movement) and actually fell 0.4% during the September quarter. In the last 12 months, prices have increased 7.9% across the country.

Well, the annual price increase isn’t too bad at all then?

Not at all – price growth has been very reasonable in the last 12 months when you look at it like that.

However, it’s worth remembering that back in March, the annual rate of growth was running at 12.5%, and above 18% in Melbourne. So prices really have cooled.

But given how much everyone has been worried about a housing bubble, that’s probably no bad thing.

Exactly right. The housing market really did overheat in late 2009 and 2010, when prices were inflated by the enlarged first home buyers’ grant.

So what’s affecting house prices right now?

It really all comes back to the succession of interest rates rises we’ve seen from the RBA (and which have been passed on gleefully by the banks), which have really taken a lot of the heat out of the market. Borrowers have been forced to rethink their financial capacity and have in turn had to scale back their purchases.

This has forced sellers to rethink their options. Houses are staying on the market for longer and vendor discounts (that is, the gap between a seller’s original asking price and their eventual selling price) have increased.

You also get the sense a touch more common sense may have entered the market, as buyers themselves started to baulk at the sort of asking prices we were seeing earlier in the year.

So prices are now going sideways. Is that likely to continue?

Residex chief Christopher Joye argues house prices have been closely tracking disposable incomes, and says prices are likely to remain flat for at least the rest of the year. That view is supported by recent auction results, which have been solid but not spectacular, and housing finance data, which has been weak for the last six months.

What about into 2011 and beyond?

For Joye, the outlook depends on interest rates. He’s telling buyers to be prepared for rates to rise at least 1.5% in the early part of 2011, which he says is likely to put “downwards pressure” on prices.

Price falls?

Probably not. Joye agrees with other analysts such as ANZ’s Paul Braddick that a strong labour market and growth in disposable income should help put a floor under house prices. Braddick also suggests the lingering housing shortage – he puts it at 30,000 homes a year – will also help prevent any big price falls.

But how long will the market stagnate?

It’s just too hard to say right now. Westpac’s Matthew Hassan and Macquarie’s Rod Cornish are tipping prices could continue to track sideways for one to two years, as the cooling process continues.

However, this bit of breathing space isn’t such a bad thing – it will help dispel any bubble fears, and allow household budgets to strengthen further.