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House Price Boom at an End, say Propell Valuers

The year-long boom in the residential real estate market is at an end, according to Propell National Valuers. “The market is showing all the signs typical of the end of an innings”, says economist Linda Phillips, the National Research Manager.

“Forget the past. It is now May and the market faces headwinds in the form of the traditionally slower winter months, the painful federal government budget and rising unemployment”, she added. “Any impetus from the declining interest rates of last year has now worked through the market. The federal budget is likely to impact badly on consumer confidence and strip demand from the market which may need a further lowering of interest rates to restore spending.”

With winter approaching, agents had already started to express nervousness after the long Easter break. While historical house prices are still showing improvements and auction clearance rates remain relatively high, there are reports of an increase in listings on the market nationally and a sense that vendors are starting to have to meet the market, instead of holding out for their full asking price. The increased supply of listings on the market in May will be trading in the face of negative headlines about what the federal budget might include, and then the reality, after May 13, of what it did include.

It now appears that the housing market itself will not be the subject of direct attacks in the budget. Propell was first to highlight the risk of the abolition of negative gearing in the budget, which is only politically possible at a time of low interest rates and a rising market. This was reportedly considered by the government, along with curbs on superannuation tax breaks and including the family home in the assets test for pensions, but these have been dismissed as politically impossible. Even disregarding the voter backlash, the government has to consider what it can get through a hostile senate.

However this does not rule out any tinkering with marginal rules for the sector. Imposing a limit on the family home of say $5 million for asset test purposes would have limited direct impact while opening the door to reduce the threshold in the longer term.

The greater risk to the housing market lies, not in any specific targeting in the budget, but in the net impact of the expected reduction in government spending, increase in taxes by any name and employment levels. These changes, no matter how they are arrived at, will reduce the purchasing power of consumers and increase unemployment through reductions in the size of the public service. While these things can be argued as necessary, the net impact on the real estate market will be to reduce demand. We are likely to see a correction in house prices during the winter months with median price reductions in some states.

According to RPData, Sydney and Melbourne home values are up 5.1% year to date but Sydney was down -0.3% on the week, Melbourne down -0.3% on the month. Brisbane has shown growth of 2.7% year to date, while Perth fell -0.6%. With sharply higher unemployment, Perth agents are reporting a sizeable fall in demand for buying or renting and this market is likely to be the first to show significant price falls over the next year.

While the housing market will naturally react to tighter demand conditions following the budget, the intent of the government is to get the pain over with in 2014 and if this leads to lower interest rates and an improved outlook in 2015 then the housing market will stabilise later in the year.

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