House prices to fall following next interest rate rise: RP Data

An increase in the cash rate will spark house price falls, according to Cameron Kusher, senior research analyst at RP Data. 

The June RP Data-Rismark Hedonic Home Value Indices reveals that while national houses prices fell for the sixth straight month, down 0.2% on a seasonally adjusted basis, the drop in values has been moderating since January, when capital city values fell by 1.2% due to the impact of natural disasters. 

However, Kusher told Property Observer that if rates go up (ANZ is forecasting a rate rise as early next week, HSBC in the fourth quarter of 2011), bigger monthly falls in house prices are expected. 

Besides interest rate fears, Kusher says problems in the US and Europe need to be resolved to increase confidence in housing and bring investors back into the market. 

Rents and yields need to increase further to attract investors, he says. 

“Yields are not where investors would like them to be… Some cities are doing better, for example units in Brisbane and Sydney,” he says. 

Rismark economist Christopher Joye says: “We think the RBA is likely to raise rates at least once or twice more to address Australia’s burgeoning inflation problem, which means dwelling values will probably soften a bit further. This should open up attractive investment opportunities.”

“Higher rates means the rental market will tighten beyond its already firm levels, with vacancy rates near all-time lows. In turn, this will drive rents and yields even higher. Over the next year we expect to see wages and disposable incomes continue to rise solidly while house prices flat-line or taper modestly,” Joye say

According to the latest index, Canberra has been Australia’s best-performing housing market over the last three months. 

Reflecting the flat state of the national market, Canberra house prices only increased by 0.5% over the June quarter, but still easily outperformed the next best market, Sydney, where house prices have fallen by 0.2% over the quarter. 

Melbourne house prices recorded the biggest quarterly fall of all capital city markets, down 1.6%, with Perth and Brisbane both recording falls of 1.3%. 

The Victorian capital also has the lowest rental yield, with gross rental yields of 3.7% for houses and 4.3% for units. Darwin is the strongest, with yields of 5.2% for houses and 5.6% for units. 

For the year to date Canberra is now the second-strongest housing market, behind Sydney (up 0.5%), with values down 0.3%. 

Brisbane remains easily the most depressed, down 6.3% compared with the same time last year, followed by Perth (4.7%), Adelaide (3.1%) and Darwin (2.7%).

Kusher says Canberra along with Sydney is the country’s most resilient market. 

Key reasons for this include the government’s heavy control of land release to developers and new housing supply relative other states, its low unemployment rate and “pretty decent” rental yields. 

“Rental yields [of 5% for houses and 5.4% for units] are encouraging people to invest in the Canberra market,” he says. 

“The other factor is Canberra’s big public service sector, with a lot of people earning above-average wages.” 

Kusher says the falls in Melbourne house prices reflects a market that is now correcting itself following two periods of accelerated growth in excess of the capital city benchmark.

“We have seen the same thing happen in Brisbane and Perth,” he says. 

The latest index also revealed the continued weakness in the premium market with the most expensive 20% of the market down 5.6% year-on-year, well in excess of the 2% drop nationally. 

“This comes back to poor equity markets and low confidence,” Kusher says.