Chat with us, powered by LiveChatInterest rate rises loom but home prices 'won't crash'

Interest rate rises loom but home prices 'won't crash'

Property prices won't experience huge losses over the next three years but interest rates will rise to almost 9.5 per cent by 2014 to force buyers back onto the sidelines, a new study says.

The report by BIS Shrapnel, released today, dismisses forecasts of sharp falls in prices over the short to medium term and predicts prices to remain steady through the rest of 2011 "with some cities even showing moderate price growth over the two following years".

Report author Angie Zigomanis said the drop in home prices to June this year had been caused by the government's withdrawal of stimulus spending, rising interest rates and a 50 per cent pull-back in the number of first-home buyers entering the market.

But he said buyers would return as investment from the mining boom started revving up the economy through 2012.

"The only question mark for us is interest rates. Our forecast is for a half a per cent rise later this year, and another half a per cent rise in the first-half of next year," said Mr Zigomanis.

"In an environment that is strengthening, we can probably handle that at current price levels. People have factored those rate rises in, so as the economy picks up people will wade back into the market knowing that there is a couple of interest rate rises on the horizon."

He said the forecasts were based on unemployment falling below 4 per cent in "a strong economic environment" where rising wages and inflation would see the RBA hike rates.

"Housing rates are consequently forecast to peak at 9.4 per cent by the end of 2013. While the momentum in purchaser activity is expected to continue into 2012-13, rates at this level will eventually bring about a downturn in both the residential market and the economy over 2014."

Melbourne's forecast median house price would hit $575,000, a 3 per cent rise on a year earlier, but Mr Zigomanis noted there was "little upward pressure on prices" as the construction of new dwellings was beginning to exceed demand

In Brisbane, the median house price would slide 4 per cent over the year to $440,000. The report noted that "underlying demand in the Queensland market has been weakened by lower overseas and interstate migration inflows that have fallen to long term lows". The Gold Coast and Sunshine Coast regions were expected to have moved in tandem with Brisbane.

Source: The Age Domain