Earlier today I posted a comment by a property planner on “why the Australian housing market will not crash“. Well, now they have extra support from the big end of town.
Here’s what BIS Shrapnel have to say in the media release for their Residential Property Prospects 2011 – 2014:
Despite many capital cities recording a decline in median house prices in the year to March 2011, leading industry analyst and economic forecaster, BIS Shrapnel, is not expecting a property price crash. The company is forecasting steady prices through 2011, with some capital cities even showing moderate price growth over the following two years to 2013.
….
With affordability now more strained, price rises will be moderate, even with BIS Shrapnel’s modest outlook for interest rates. Zigomanis says the forecast 50 basis point rise in 2011/12, and a single rate rise forecast for the latter half of 2012, will not be sufficient to significantly dampen the recovery in activity, particularly with the unemployment rate forecast to fall below four per cent in 2013. However, as variable rates push past the nine per cent level through 2013, demand will begin to wane despite the booming economic conditions.
….
Brisbane
The Brisbane residential property market has arguably been the weakest of the state capitals, with the forecast median house price of $440,000 in June 2011 representing a four per cent decline for the year. The state economy has weakened considerably due to the completion of a number of big non-residential and engineering projects related to the mining sector and, more recently, flooding. Strong growth in house prices up to 2008 has also impacted on affordability relative to the other eastern state capitals. As a result, underlying demand in the Queensland market has been weakened by lower overseas and interstate migration inflows that have fallen to long term lows.
New dwelling construction in Queensland has collapsed back to pre-GFC levels, and while BIS Shrapnel estimates the Queensland residential market is roughly in balance, the decline in supply will result in a rising dwelling
deficiency. This will see vacancy rates tighten to below the balanced market rate of three per cent and underpin a recovery in rental growth.“The next round of investment in new resource projects is expected to commence in 2011, economic conditions are also forecast to rapidly improve, and the ensuing employment and income growth will create a greater level of purchaser confidence,” says Zigomanis.
“As a result, a mild improvement in prices is forecast in 2011/12, and this will pick up in 2012/13 as the economic upturn gains traction and the underlying dwelling deficiency becomes more pronounced. Nevertheless, the impact of rising interest rates will continue to dampen the magnitude of price growth, with a total rise of 15 per cent forecast over the three years to 2014, representing an average rise of 4.7 per cent per annum.”
Now of course this goes against the thoughts of many Australians that property prices in Australia are about to collapse in a heap.
So who’s right?
Well, let’s look at their record. Back in 2008, BIS Shrapnel released a similar report covering 2008 to 2011. You can read more about it in my blog post at the time – “BIS Shrapnel: property prices will rise.”
What did BIS Shrapnel say in 2008?
2008 to 2010: rents will increase more than buying
September 2008: possible interest rate rise
Late 2009: drop in interest rates
Brisbane: 22 per cent growth between 2008 and 2011
How did they go?
In the September quarter of 2008, property prices dropped from $438,805 in the June quarter to $415,963. The current median price (in 2011) is about $430,000. That’s a long way short of their forecast 22% increase. In fact, it’s a decrease of 2%.
What about interest rates?
You can see how interest rates in Australia have fluctuated over time here:
Image courtesy of LoanSense.com.au
BIS Shrapnel forecast a possible rate rise in September 2008, but rates went down.
They also forecast a drop in interest rates in late 2009, which was when rates were going up with six interest rate rises from October 2009.
So that’s three out of three they got wrong. Hmmm.
So will they be right this time?
Well, I wouldn’t bet my house on it. Sorry, no pun intended.
Really, we just don’t know. The forecasting of property prices seems to be one of those things where you might have ten people in a room, with thirteen different opinions. The people at BIS Shrapnel have clearly invested a great deal of research into this, and they should not be dismissed lightly. If you want to get all of the juicy details from their report, you can buy one for a lazy $1045. Clearly, this stuff is serious. But if you relied on their research in 2008, you would have ended up in the soup.
Having said that, there are so many factors that seem to go into pushing property prices up and down. Is it possible for anyone to totally get it right?
Update – 4th July, 2011:
Iggy Damiani from Sky’s Real Estate News left a comment here to suggest that he was pointing out similar data in his next news report. You can see Iggy’s report here – it’s a good one, so well worth seeing.
He basically makes the same point I have in the above post – that BIS Shrapnel were a fair way off in a previous set of predictions, so care must be taken with regard to the analysis of their new property forecast.
Good article, I agree we must take anything BIS write with a large pinch of sodium chloride. The Aussie real estate bubble is bigger than any on the planet. Australia might have had strong population growth in the past to fill those houses, but the latest ABS data shows immigration in freefall.
For Australia, the party’s over and everyone knows it. Vendors are now taking their overpriced homes off the market and putting them up for rent because they can’t sell! It was obvious asset prices couldn’t keep rising forever!
Australia has a serious debt problem that needs to be addressed. But at the moment it’s not even being acknowledged. Why not? Could it be that if we acknowledge the debt and the need to deal with it, we have to acknowledge its cause? And could it be that the cause is too unpalatable to reveal? Could it be that successive Australian governments, along with business, have been running a Ponzi scheme with our assets, our resources and our future? It’s unsustainable. Auction results have totally collapsed. No government wants house price growth to slow but it’s unavoidable now.
Slow growth undermines the short-term share price of big business (and CEO remuneration), as well as the electoral performance of the government. So to facilitate growth, the Government turns a blind eye to the fact that a significant proportion of demand fuelling “growth” is debt driven; debt-financed demand has constituted around 20% of total demand in the Australian economy. The best way to keep growth on the up and up is to keep everyone spending and money cheap. Consumers are told that spending is the right thing to do by businesses that profit from consumer expenditure and by governments who bask in the glory of booming growth figures.
The availability of cheap credit and consumer binges drives up prices, so more debt is needed to keep the spending going. People feel wealthier as their house prices have gone up and they have more stuff, but they don’t realise that negative gearing and similar tax rorts just makes things worse. People their house will fund their retirement, so they are happy to spend more and save less. Everyone is happy – particularly business and government – so long as the spending binge continues – and money can be found to keep servicing the mountains of debt being accumulated. And therein lies the rub. How is all this debt to be financed?
Stanley Nao
Australian Property Price Crash Forum
Well done!
I did a segment on Real Estate News (Sky Business) about this. It will go to air this Sunday at 1.30pm
Iggy – Thank you! Let me know if your segment will be viewable online, as I’d be interested to see your report.