Sydney and Perth to see property price growth of 20% by 2014, investor sentiment to improve: Report

Property prices are set to grow over the next few years, as consumer confidence rises in tune with a growing demand from Asia for Australian resources, according to a new report compiled by QBE Lenders Mortgage Insurance in conjunction with BIS Shrapnel.

The report also predicts that residential property investment is set to pick up after a disappointing few years, with Western Australia tipped as the state to record the biggest growth.

The report comes just a few days after separate research from Deutsche Bank noted the amount of investment in residential property has declined over the past year, partly due to the increase in maintenance costs and flattening prices.

The QMI report states that despite the current weak economic environment, delaying the recovery in first home buying, the outlook is positive with the group confident prices have reached their bottom.

Perth and Sydney are set to record the largest growth over the next few years, with growth of 20.2% and 19.4% respectively, due to the growth of mining and resources in that area, along with an insufficient number of dwellings in Sydney.

Brisbane and Darwin are both set to record growth of 16% and 17% respectively, with growth associated with mining in those cities as well. However, more moderate growth between 6-8% will be found in Adelaide, Hobart and Canberra through to June 2014, due to an excess of housing stock.

Melbourne is the city with the weakest forecast, with growth of only 6% over the next three years.

“Melbourne is the only major capital where affordability is currently worse than June 2008 levels when housing interest rates peaked at 9.6%,” the report states.

“Combined with record levels of new dwelling supply coming through and eroding the current dwelling deficiency, any upward pressure on prices will be minimal.”

Meanwhile, the QMI report states the return of investment dollars will be associated with growth in the mining sectors – mostly located on the west coast.

“The return of more substantial investment in the resources and mining sectors is expected to lead to accelerating economic growth, which is projected to drive greater employment and income growth.”

According to data from the Australian Bureau of Statistics, the value of loans to investors jumped by 15% in 2009-10. However, through 2010-11 the value dropped by 8% as sentiment fell in conjunction with higher borrowing costs, “as well as creating wider affordability constraints and causing dwelling prices to fall”.

But the QMI report states demand will increase as rates remain stable over the next year, with growth in investor activity to pick up in most states.

Northern Territory, Western Australia and Queensland have seen loans fall 30%, 28% and 22% respectively, but QMI says all will see a “greater rebound” in the value of residential investment loans.

“Underlying demand is expected to benefit, as these states attract higher net inflows of migrants from interstate and overseas due to greater job creation and income levels.”

At the same time, however, dwelling supply has contracted over the past three years in Queensland and Western Australia, “which is expected to translate into a rising efficiency of dwellings over the next three years to June 2014”.

This is also predicted to occur in the Northern Territory as demand outpaces completions and as a result, “these cities consequently offer the best potential for capital growth”.

“Western Australia is forecast to lead the upturn in investor demand, with Queensland lagging due to the relatively weaker state of its local economy before it emerges during the second half in 2012.”

Investor activity is set to improve in 2011-12 in New South Wales as well, with QMI noting that after a post-GFC downturn, real house prices are still below peak 2004 levels, “providing scope for future price growth”.

The report also notes solid rental growth should come due to tight vacancy rates.

But investors are out of luck when it comes to Melbourne. The report notes that Victoria is likely to see the value of investor loans fall away in 2011-12, with it being the only state to grow 3% in 2010-11.

Constrained affordability and the forecast of rising interest rates to 2014 will mean Melbourne only sees a minimal amount of price growth in Melbourne.

“The current high level of residential construction activity in Melbourne will result in a significant addition of new rental stock, relieving vacancy rates and placing downward pressure on rents.”

Oversupply in Adelaide, Hobart and Canberra will also mean growth is subdued in those cities over the next three years.