Rents will rise as house prices fall: Westpac
Friday 2 July 2010
House prices will fall gently for the next two years before levelling out, but rents will rise because property investment is now returning less because of the October personal tax cuts, says Westpac in its latest housing market update.
By The Landlord
And while residential property sales may pick up a little in coming months as some property investors reorganise or quit the market, Westpac expects several years of subdued sales volumes and prices.
"Based on today's fundamentals, we'd say houses are only slightly overvalued," said the bank's chief economist, Brendan O'Donovan, after a fall of 12% in inflation-adjusted terms since 2007 when the housing market was "grossly overvalued".
"We are forecasting modest house price declines, in the order of 2% per annum, for 2010 and 2011."
However, different parts of the market would react differently, especially to the October tax changes, with the likelihood that rented, typically lower-value properties would fall in price while high income earners would have more disposable income after the tax cuts, underpinning high-end property.
The tax cuts would reduce the value of tax-deductible losses on rental properties, and Westpac predicts this will push rents 7% higher than they would have been without the tax cuts.
"Higher rents and lower house prices will tend to increase the rate of ownership," said Westpac, although these trends would take years to work their way through.
"Most likely, we will experience years of higher rent growth and weak house prices, rather than a big-bang adjustment as soon as the tax cuts are implemented."
The outlook for mortgage interest rates is another brake on house price inflation, as the low interest rates of the early 2000's would not be repeated in the tighter global lending environment emerging after the global financial crisis.
"Bank funding costs are much higher than they were last decade, and the Reserve Bank cannot use the Official Cash Rate (only now coming off an extended period at a historic low point) to shelter us from that forever."
Commenting is closed
Periods of house price decline are rare and "short-lived", says economist Tony Alexander, amid forecasts of a drop of 10%-15% this year.
The Reserve Bank says the commercial property sector is vulnerable to the Covid-19 crisis. But PMG Funds' chief executive believes that while there’ll be short-term pain, the biggest long-term impact will be structural change.
Mortgage lending fell to its lowest level on record last month as the property market ground to a halt during the Covid-19 lockdown.