Housing, rates heading higher

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Australia’s housing market will see up to 20% growth in house prices over the coming three years, though the Reserve Bank cash rate is also likely to rise and hit 6.5% by mid-2013.

QBE LMI’s Housing Outlook, prepared by BIS Shrapnel, predicts state capitals Perth, Sydney and Adelaide will see the strongest median house price growth over the period, at around 20%.

The most moderate city house price rises will be seen in Melbourne, at 9%, while Brisbane (15%), Hobart (13%), Darwin (13%), and Canberra (10%) will fall in between these extremes.

The strong price rises will be propelled by an improving local economic environment, as well as a deficiency in dwelling stocks across most capital cities, according to the report.

Speaking with Australian Broker, QBE LMI chief executive Ian Graham quashed recent doomsayer predictions of a cataclysmic 40% decline in Australian house prices.

“It’s hard to imagine any price decline in an economy that is growing, where unemployment is falling, and there is significant deficiency of stock – as long as the demand side is higher than supply – that’ll act as a floor in terms of where the current house prices are,” he said.

Graham drew parallels with the downturn in the early 90’s when interest rates hit 17%, unemployment was at 11.5% nationally, and NSW property prices had increased rapidly over a two-year period. “Under that sort of pressure, prices only decreased 10%” he said.

The report predicts that slacker house price growth experienced in early 2010 will turn around later in the 2010 calendar year, and in early in 2011. Part of this resurgence will be thanks to the return of first homebuyers, following a quiet first half of 2010.

“Although first homebuyer activity was pulled forward into 2009 and is down 50% to 60% on the levels seen at the same time last year, demand is forecast to return to more normal levels - around 130,000 to 140,000 approved loan applications in 2011,” Graham said.

In good news for mortgage brokers, Graham said the national outlook for housing finance was positive, despite a strong 2009 year in "every respect", which had made for a slow first half of 2010.

"Conditions will be more favourable, there will be some increase in activity and higher volumes of new business over the next 12 months, with that increasing further going into the 2012/13 year".

However, the house price rises are expected to be accompanied by a series of interest rate rises throughout the period, with the RBA cash rate expected to rise to 6.5% by June 2013.

Despite widespread expectations of a cash rate rise before the end of 2010, the QBE LMI report suggests the next upward adjustment will not occur until the first half of 2011.

And while banks continue to threaten rate rises outside of the RBA to recover the cost of funding, the report claims standard variable rates will only rise to 9.1% by 2013 – despite higher movements by the RBA – as margins improve and not all rises are passed on.

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