Economic Forecast for the Australian Property Market

Summary: Is the Australian real estate market heading for a slowdown or even a crash, or is it set to continue booming in 2005?

The residential property market in Australia has gone from strength to strength over the last 3 years, but what’s the likelihood that this growth will continue?

Is the Australian real estate market heading for a slowdown or even a crash, or is it set to continue booming in 2005?

There are many factors to consider when examining the state of the real estate market in any country, but when you’re talking about a country as large as Australia it’s important to examine the trends, fashions and fluctuations affecting the major cities of say Sydney and Melbourne first. 

Any factors that affect the major capital cities will ripple out in time, affecting surrounding cities and towns and eventually affecting the entire country.  This means it is possible to forecast the progress of the housing market country-wide based on what’s happening today in the main cities.

Up until the 0.5 percentage point rise in interest rates in November/December of 2003, price rises in Sydney and Melbourne were racing unsustainably ahead.  The market was truly booming and first time buyers were finding it increasingly difficult to enter the housing market. 

The interest rate rises caused a slight slowdown in Sydney and Melbourne in particular, a slow down which went on to affect all the major capital cities across the country by March 2004.

However, the slowdown was just that - a slow down! 

So far there have been no signs that the house price rise bubble is about to burst.  Demand in the real estate market remains strong, though the demand from first time buyers and property investors has reduced due to the height prices have reached.

Demand is seemingly being sustained by the fact that Australia’s GDP has improved dramatically despite the worldwide economic slowdown.  The rising output in the domestic economy has been offsetting the global slump it seems, so business and consumer confidence remains robust and household disposable incomes have risen - all this is thanks to an increase in employment opportunities and certain tax cuts and breaks. 

Finally, an overall change in attitude has led to increased assistance and financial support from families making owning property in Australia a realistic dream for more people.

The fact that the ‘supply and demand’ fundamentals remain strong should prevent any sharp declines in the residential property market in 2005, though the unsustainable price increases of the last 2 - 3 years are expected to weaken substantially in all the major capital cities. 

One exception will be in areas where demand outstrips supply of course, e.g., harbour fronted properties in Sydney.

Interest rate rises are expected to increase which will of course affect the housing market, and there is much speculation that these rises will eventually bring about a halt in the growth of the real estate market across the board by the end of 2006 which could cause a decline in real estate prices in some cities by 2007.  This is currently conjecture only.

So what other factors may affect the housing market and property prices in Australia in 2005 and beyond? 

Well, it seems that business psychology is starting to shift.  The focus is changing from cost cutting and cut backs to ‘gearing up’ for increased demand and expansion. 

Add to this the fact that underinvestment across the business sector has lasted for seven long years and has resulted in capacity shortages and you can see that the main preconditions for strong and sustained growth in business investment are in place...hopefully resulting in income and employment growth for the individual which will lead to more personal wealth being available and an increase in consumer spending patterns...though consumer spending has actually continued above average rates for three years in a row already in Australia.

The construction industry is forecasting an upturn in demand and expects non-residential construction to replace any downturn in income from the housing sector should it falter.

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