Perth, Sydney and Brisbane best short-term investment prospects: BIS Shrapnel

Investors should be looking at the Perth, Brisbane and Sydney housing markets, according to forecasts by BIS Shrapnel.

House prices are forecast to rise by between 15% and 19% in these capital cities by June 2014, led by Perth.

BIS Shrapnel predicts Perth median house prices will rise by 19% from the current estimated June 2011 median price of $480,000 to $570,000 by June 2014.

Sydney house prices are predicted to increase by 18% over this period, from $640,000 to $755,000, and Brisbane is forecast to record the third-fastest growth rate of 15%, from $440,000 to $505,000.

The solid growth expectations for Perth, Brisbane and Sydney are forecast on the basis of these markets “currently building new dwellings at well under the level of underlying demand” combined with relatively weak price growth in recent years, the company says.

Rental stock is expected to tighten notably in Brisbane and Perth, “which will create a flow-on effect to upgrader demand,” says BIS Shrapnel senior manager and study author Angie Zigomanis.

“With economic conditions and income growth to be strongest in Western Australia and Queensland (and to a lesser extent New South Wales), this should underpin moderate price rises averaging 5% to 6% per annum in the three years to June 2014,” he says.

House prices in all the other capital cities are forecast to grow by less than 10%, with BIS Shrapnel expecting Melbourne house prices to grow notably slower than the rest of the east coast market –just 6% by June 2014, from $575,000 to $608,000.

Only the currently flat Hobart market is predicted to grow at a slower rate than Melbourne – just 5% over the next three years, from $365,000 to $385,000.

The modest outlooks for Melbourne, Adelaide, Hobart, Canberra, and Darwin are a result of affordability in these markets at close to long-terms lows and construction currently exceeding underlying demand.

According to BIS Shrapnel, prices levels in these centres will be underpinned by strengthening economic conditions, “although there is very little upside, given the diminishing pent-up demand,” Zigomanis says.

The median house price in these centres is forecast to rise 1.5% to 2.5% per annum over the next three years and to record declines in real terms.

Average median house price growth across the eight capital cities to June 2014 is forecast at 10.75% on the back of the resources boom and employment growth.

Zigomanis calls current market conditions “just a lull or a pause”.

“Economic growth is forecast to regain traction through 2011 and continue to accelerate in 2012 and 2013 as resources investment flows through to the rest of the economy,” he says.

“Strengthening employment growth – the unemployment rate is forecast to fall below 4% in 2013 – will also see net overseas migration inflows turn around, and the underlying demand for new dwellings begin to rise. With new dwelling starts currently declining, the corresponding fall in completions means the underlying deficiency of dwellings nationally will increase.

“This will underpin the strength of residential conditions, causing rental markets to tighten and rental growth to pick up, particularly in those markets where it has been weakest in the last couple of years,” he says.

Another factor contributing to improving market conditions will be a correction in first-home buyer demand, “which should begin to revert back to long-term averages as the ‘pull forward’ effect is worked through”.

Although interest rates are forecast to rise further, Zigomanis says historically this is not inconsistent with rising first-home buyer demand.

Zigomanis says the drop in demand from first-home buyers has bottomed out and should slowly improve over the year. 

BIS Shrapnel is forecasting a 50-base point rise in the cash rate in 2011-12.