Here's Why UBS Says Australian House Prices Will Rise By 10% This Year

Getty/ John Moore

UBS is expecting Australian house prices to rise by 10% this year, thanks to record low mortgage rates, relatively subdued house prices and a growing population.

In a detailed economic note yesterday, economists George Tharenou and Scott Haslem said they had upgraded their forecast for a lift in house prices to 10% in 2013 and 5% in 2014, compared to 7% and 3% previously.

Here’s why:

– The Reserve Bank’s August rate cut has driven mortgage rates to a record low.

– Home building activity is forecast to rise, with UBS expecting 154,000 dwelling commencements in 2013 and 160,000 in 2014 and residential building approvals averaging 160,000 in recent months – despite a fall in June.

– House prices have rebounded from a 2010 downturn, so people are likely to expect future gains. Housing affordability is “near the best point in a decade” because interest rates are low, house prices have remained below their record peak level, and household income has continued to grow. Surveys have also indicated that households are becoming less cautious about wanting to invest in real estate.

– Auction clearance rates of 75%-80% are the highest since mid-2010.

– Rental yields are at about 5% for a 2-bedroom unit – near the highest in over a decade. Investment properties are thus more attractive than alternative assets like dividend yields or term deposits. Rental vacancy rates were at an equal 8-year high of 2.4% in Q1 2013, but still below the long-term average.

– Australia’s population growth rate rose to 1.8%, or 394,000 people a year with strong net overseas migration of 236,000 and record births of 305,000 in 2012.

– First home buyer activity is edging up thanks to government incentives that favour newly built homes.

– Home loans jumped to a near record high level of 16% in June, although consumers remain cautious and housing credit growth is subdued, edging up to about 5% this year.

UBS says Sydney is still the most expensive capital city for housing, and the market will likely remain strong given strong investor demand. They expect house prices in other cities to strengthen, but “Perth looks vulnerable as mining activity weakens”.

There’s been some talk of a housing bubble recently; UBS notes that this could be a risk if the RBA is forced to cut rates again because economy remains weak but the AUD fails to fall.

“This view reflects that the boost from rate cuts historically dominates the hit to sentiment & income from higher unemployment – causing house prices to accelerate,” they explain.

“Hence, under that scenario, housing may face targeted (but not publicly announced) macro-prudential tightening measures.”

Now read: SHANE OLIVER: This Doesn’t Feel Like A Property Bubble Because People Aren’t Acting Crazy

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