Report says house prices growth will slow over the next three years

Growth in residential property prices will slow over the next three years as first home buyers back out of the market and interest rates move to more normal levels as the economy recovers, a new BIS Shrapnel report reveals.

It comes as figures from the ABS show lending finance is declining, while clearance rates are dropping across the country as first homer buyers back away from the market and upgraders become more hesitant to sign up for mortgages inflated by above-average price growth.

The Residential Property Prospects 2010-13 report shows prices will stall as upgrade demand falls due to the decline in first home buyer activity, with affordability still a key issue as prices remain high alongside limited supply.

Sydney prices are set to grow by about 6% per annum over the next three years, while Melbourne’s solid growth will moderate by 2013 with an average yearly rise of just 3.5%.

BIS Shrapnel senior project manager, and author of the report, Angie Zigomanis says the massive price growth recorded over the past 12 months was a result of low interest rates. As the economy recovers, and rates rise, this will no longer be the case.

“I think the price rises we’ve seen over the last nine to 12 months are unsustainable, and they obviously won’t last forever. Especially in Melbourne, with such strong growth and low interests, I think activity will slow there over the next three years.”

Zigomanis says buyers should expect average growth of about 3-4% over the next three years.

However, he also says price falls are not likely and there will still be at least average growth recorded through 2013, pointing to an annual 26% rise in loans to investors in the March quarter.

These comments come after some property experts have said price declines could be recorded during the remainder of the year if lending finance data remains weak.

“We don’t expect there to be price falls overall. There may be a quarter here or there, but overall, prices are still going to grow. The economy is in a recovery phase, we don’t expect employment to rise anymore and from a population perspective, there are still good pressures on property. The key is interest rates.”

He also says price growth will remain muted over the next year as 1.5% percentage increase between October 2009 and March 2010 has “already begun to strain affordability”.

Zigomanis expects another 0.5% rise in interest rates over the next financial year, and a further 0.5% rise in 2011-12. However, BIS Shrapnel expects a further rise of 1% in 2012-13, “if not more”, as investment projects in mining begin to fuel economic growth.

Specifically, Zigomanis says price growth will remain highest in Melbourne, the country’s hottest market, while moderate growth is expected in Brisbane, Hobart and Canberra due to weaker demand and moderate economic conditions.

Prices in both Sydney and Perth are still under previous peak levels, which could mean price growth in the next few years could remain above average, while price levels in Adelaide are also below mainland capital city averages.


During 2009, Melbourne prices increased by 26% to a median of $550,000, the BIS report claims. But as a result, prices are now “very strained”.

“On top of this, although only moderate rises in interest rates are forecast in 2010/11 and 2011/12, this will nevertheless continue to tighten the screws on affordability in the city,” Zigomanis said in the report.

The report claims the city will record an 11% increase over the next three years, equating to about 3.5% per year. The main driver of price growth will be the “overall deficiency” of dwellings.


With Sydney’s median price at $615,000, representing a 12% increase for the year, house prices are still 10% below peaks. However, new dwelling construction is still below the levels needed to accommodate strong population growth, which Zigomanis says will put pressure on prices.

“With interest rates now expected to be more stable and economic and income growth gaining traction from 2010/11, confidence is expected to pick up and underpin reasonable, although unspectacular, growth in the coming years.”

“We are forecasting total price growth in Sydney over the three years to June 2013 to be 20%, representing average growth of around 6% per annum.”

Newcastle and Wollongong

Prices in Newcastle and Wollongong are lower than in Sydney, weakened due to declines in first home-buyer activity. However, demand will grow as price pressure in Sydney moves residents outwards. BIS forecasts 18% growth over the next three years.


Brisbane, which currently has a median house price of $465,000, has recorded growth of just 5% per annum over the past two years. Weaker economic conditions in Queensland, due to a downturn in mining investment, have impacted the market.

“By the time economic conditions in Queensland gain momentum we expect the peaking of interest rates in 2012/13 will halt any traction in price growth that may have emerged,” Zigomanis says.

“As a result, overall price growth to 2012/13 is expected to be only moderate, totalling 12% in the three years, or just under 4%.”

Gold Coast and Sunshine Coast

Prices on the Gold and Sunshine coasts will remain similar to activity in Brisbane, with BIS predicting an increase of 11% for the Gold Coast over the next three years, along with a 13% increase for the Sunshine Coast.

Townsville and Cairns

Price growth in Townsville and Cairns will remain moderate in 2010-11 before a boost in resources investment kicks in. Growth over the next three years is expected to be 17% for Townsville and 16% for Cairns.


Adelaide currently has the lowest median price of all the mainland state capitals at $410,000, but it still represents a 14% increase for the year. Average growth of just 3% per year, or 20% over the next three years, is expected by 2013.


The property market in Perth has slowed over the past few years, after recording solid growth during the five years to 2007 as resources investment boosted the economy. The current median house price is at $500,000, representing an increase of 11%, but Zigomanis says a similar result can’t be expected over the next few years.

“With prices below peak levels in real terms, and income in Perth set to grow substantially as the next round of resource expansion projects get up and running, solid price growth should continue,” he says. “Nevertheless, further increases in interest rates will prevent the boom in prices that we saw in the last upturn.”

House prices in Perth will rise by 22% over the next three years, equating to an annual rise of about 7%.


Hobart recorded 16% growth over the past year to $390,000. Zigomanis says price growth will remain moderate as the market continues to depend on residents from the mainland coming to retire.

“Any further significant price growth would reduce Hobart’s affordability advantage and, consequently migration,” he says. Price growth will be about 12% over the next three years, equating to about 4% per year.”


With a current median house price of $520,000, representing a 16% increase of the past year, price growth has been supported due to Federal Government investment.

“However, most of the stimulus measures are expected to end through 2010, and this will impact on employment,” Zigomanis says. “In addition, the large Federal Budget deficit means employment growth is expected to be weak, as the Federal Government attempts to keep spending in check to bring the budget back into surplus.”

Prices will grow by 14% over the next three years, an annual increase of about 4.5%.


Darwin currently has a median price of $570,000, representing a solid 23% increase over the past year. That growth has been supported by the oil and gas sectors, which remained strong during the downturn.

But BIS Shrapnel says recent price rises mean Darwin property is at its most unaffordable level, which means price growth will remain stunted to 12% over the next three years.


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