Rental incomes will continue to rise in Australia because of a lack of supply say economists

Property investments in Australia will continue to generate higher returns say economists. However fewer first time buyers and increasing interest rates will result in slower residential property price growth, as reported in the Residential Property Prospects Report 2010 to 2013 from BIS Shrapnel.

Senior project manager Angie Zigomanis said first time buyer activity has dropped after the expiry of the first homeowner’s grant boost at the end of 2009. And affordability has also suffered as interest rates rise, meaning recent levels of price growth cannot be maintained. Zigomanis believes investors will replace some of the demand lost as a result of those factors, however, meaning house prices will continue to grow. And the more stable interest rate environment is expected to strengthen purchaser confidence as economic conditions strengthen.

Sydney and Perth are expected to obtain the strongest growth in home prices in the coming years while weaker demand and local economic conditions are expected to lead to more moderate price growth in Brisbane, Hobart and Canberra. Melbourne and Darwin have already experienced very strong price rises and low affordability will limit further rises, BIS says in the report.

Lack of rental properties will keep pressure on rents, it adds. But the market is in a precarious position and it is only a matter of time before it crashes, according to US investor and co-founder of global investment management firm GMO, Jeremy Grantham. Grantham famously predicted before the global financial crisis that at least one major bank would fail and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will simply cease to exist.

Now he claims that Australia has an unmistakable housing bubble and that prices need to come down by 42 percent to return to the long-term trend. In Australia he describes the real estate market as “a time bomb” just waiting for interest rates to increase and become impossible to support. Since last October, the Reserve Bank has raised the official cash rate six times and it is currently 4.5 percent.

But the RBA downplayed concerns over a house price bubble. Speaking at a business function in Sydney recently, RBA deputy governor Ric Battellino said property prices in Australia, relative to income, were reasonable. “People feel that house prices in Australia are quite high and that’s quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities and they are quite elevated.

“But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.”

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