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February 18, 2013

The forecast for house prices and interest rates


There still seems to be a bit of doom and gloom about so I thought it was time I looked at the statistics to see whether the future looks bright or if it’ll be more of the same.

BY PETER KOULIZOS

Firstly, let’s look at property prices. According to RP Data, home values fell 0.4 per cent across the combined capital cities in 2012. Some cities like Darwin, Sydney and Perth increased in value but the rest dropped in value.

At first glance, this statistic on its own looks bad but when you consider that property prices fell by 3.8 per cent in 2011, a tiny drop of 0.4 per cent isn’t so bad. So, how much lower will property prices go?

I’ll make a bold prediction on property prices: I forecast that 2013 will be the year that the market hits the bottom of the cycle.

I still think prices will fall slightly in the first part of the year but most capital cities should start to see some growth during this year.

Some of the signs that lead me to come to this conclusion are:

  • The time it takes to sell a property has dropped over the last 12 months.
  • The level of seller discounting is also dropping and is lower than it was 12 months ago.
  • The rate of decrease in property prices has slowed.
  • There are more interest rate cuts to come (which will help stimulate demand for property).

On that final point, let’s look at interest rates. The Reserve Bank of Australia’s (RBA) official cash rate is currently three per cent. ANZ Bank has forecast that the cash rate could drop a further 100 basis points. National Australia Bank has forecast a drop of 75 basis points. The futures market indicates that interest rates will drop by about 0.5 per cent this year.

The one common element between these three forecasts is that they all see interest rates dropping. Only time will tell which prediction is correct but I’d put my money on those who willing to risk their money – i.e. the futures market. I can see the cash rate dropping to 2.5 per cent in 2013.

Most forecasters see a drop in interest rates as:

  • Growth in the economy is slowing.
  • Unemployment is set to increase marginally.
  • The Australian dollar is relatively high.

The RBA knows it has to decrease interest rates so as to try and stimulate the economy. Thankfully inflation isn’t a problem at the moment so there should be no hesitation by the RBA to drop the cash rate.

I’ll make a bold prediction on interest rates: I forecast that 2013 will be the year the cash rate is at its lowest level in 50 years.

In answer to my initial question, I think property prices will fall a little more in the short term but not by much. Based on a sluggish economy, interest rates will also drop during the year. What do you think?

Peter Koulizos is a property lecturer and author of The Property Professor’s Top Australian Suburbs www.thepropertyprofessor.com.au

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