Prospects looking good for housing market

Investors don’t need to be convinced that the current residential property market will reap rewards, according to BIS Shrapnel senior economist Jason Anderson.
With rents high and continuing to grow, he says they can already see the benefits.
Speaking at a BIS Shrapnel business forecasting conference in Brisbane last week, Anderson forecasted rental growth would remain strong due to the ongoing undersupply of housing in Australia.
Rental rates have increased by 18 per cent over the past three years and he estimates they’ll rise by another 25 per cent over the next three years.
"Housing deficiency is surging and in terms of supply, things are going to get worse over the next two years," he says. "Demand will skyrocket and as long as demand continues, rents have to keep going up."
In addition to further rent hikes, Anderson anticipates house prices will experience solid growth over the next three years, with an average yearly growth of around five to six per cent.
Interest rates are also expected to remain low, making property more affordable and creating favourable conditions for investors to buy.
While there has been a lot of speculation that rising unemployment will have a detrimental impact on the property market, Anderson firmly believes that won't be the case because interest rate cuts will outweigh any potential negative effects of unemployment. He notes that the vast majority of the community won't be impacted by unemployment, while significantly more will be influenced by a drop in mortgage rates.
"The rise in unemployment will fortunately be limited to perhaps three to five per cent of all households," he says. "That leaves the other 95 to 97 per cent still thinking about their housing needs without the constraint of unemployment. Even if half of those act in a way that's more cautious because they fear unemployment, it still leaves a vast majority that will respond to low interest rates and strong growth in rent. Both of those 'forces' are supportive towards increases in property prices."
Anderson points to history to provide evidence that unemployment won't cause property prices to plummet and says it's entirely possible for rents and unemployment to rise at the same time.
"It's false to say property prices will fall because unemployment is going up," he says. "The last peak in unemployment in 1992 didn't trigger a property market meltdown."
Unemployment rose by 360,000 people during 1990/91 and 1991/92, but dwelling approvals showed a rise of 20 per cent in 1991/92 and house prices grew by an average of five per cent per year during 1991/92 and 1992/93.
The experience of the early 1990s was that investors continued to buy property despite the absence of strong property price growth, showing that the attraction of declining interest rates offset the impact of unemployment. This time around Anderson says it should be even better because interest rates have been cut well ahead of evidence of rising unemployment.
According to anecdotal evidence, he says while first homebuyers are still more active, there's already a groundswell of investor demand.
"If that's the case and it continues to build over the next month, that's a pretty early recovery in investor demand," he says. In previous cycles, Anderson notes investors have come back into the market later rather than sooner.
Strong rental growth is one reason why investors are starting to buy again and the other is that interest rates have been cut earlier and more substantially that what has been seen in previous cycles.
BIS Shrapnel's managing director Robert Mellor, also speaking at the conference, said he expected the Reserve Bank of Australia (RBA) to continue to take a wait-and-see approach to interest rates. He believes it will leave interest rates as they are for the next two to three months and will likely lower it by half a per cent in the second half of this year.
Looking to the future, he says the RBA will slowly edge up rates.
"There will be a slight upward movement in rates in the latter half of 2010 and more in 2011 and 2012," he says.
Anderson forecasts rates will rise after unemployment peaks, which would probably happen by the middle of next year.
"It will be later rather than sooner and I think it will be the first half of 2010." Anderson says investing in the residential property market is still a good prospect for the medium term. With prices likely to increase by about five or six per cent per year, he says you'll be investing more for yields than capital gain.
"Yields are increasing at a significant rate and it's the cash flow benefit which should be the focus in a world where interest rates are low. In the medium term it (residential property) will be a good investment for those reasons."
Anderson believes the argument for buying property under these circumstances is compelling and as such, there's going to be a much more rapid response from investors.
"The economy needs the housing sector to perform well, to offset the decline in business investment," he says.
While investors don't need to be told that the current market provides opportunities for good investments, Anderson says upgraders do need convincing that the market is good so that the middle part can start to pick up.