Property prices will fall across the board; report

Almost every Australian property owner is in for a bad year, with a new report from economists at ANZ bank predicting prices will fall across much of the residential, commercial and industrial property sectors.

While ANZ remains confident that Australia is only facing a “mild” recession and will fare much better than nations like the United States and Britain, the slowing economy and a looming spike in unemployment will hurt property prices across the board.

“We are not immune, and the global slump will inevitably drag domestic activity lower. Australia will experience a mild recession in 2009, the unemployment rate will rise sharply to 7.2% by the end of 2010, and weak investor sentiment will maintain downward pressure on asset prices,” wrote ANZ economist Paul Braddick.

But there are some bright spots in the gloom. Prices for small and medium retail properties appear to be holding up (perhaps helped by the fact that investors at this lower end are switching out of shares), as are office properties in Adelaide and hotels in Canberra.

Here’s how ANZ sees the various sectors performing:

Residential

Median house prices have fallen 3.9% since hitting a peak in early 2008, but ANZ expects they only have another 2% to fall and could actually start rising from early next year. While enlarged government grants and lower mortgage rates are boosting the market, a lack of new housing is the real key to a soft-landing for residential property.

“We currently estimate that by mid-2010 Australia will have an unprecedented underlying housing shortage of 250,000 dwellings,” Braddick says.

Office property

CBD office markets remain vulnerable as white collar unemployment starts to increase. The once-booming resource states of Queensland and Western Australia look certain to be hit hardest, although Adelaide office prices are expected to hold up thanks to the robust South Australian economy. But it is important to note that judging just how far office property prices have fallen is made near impossible by the fact that sales have all but dried up in the last six months.

Retail property

Falling retail sales are never good news for retail property prices. While retail vacancy rates remain relatively low, they will increase as the downturn intensifies and are already rising in Canberra and Perth. Landlords will be forced to cut back on rent increases this year. After raising rents by 5% in 2008 and 4.8% in 2007, retail landlords in Sydney are likely to aim for increases of 2% this year.

Tourist accommodation

After five years of stable occupancy rates in Australia’s hotel sector, occupancy rates began to fall last year, with the national occupancy rate sliding 2.3% to 65.3% in the September quarter of 2008. Falling occupancy combined with an increase in the number of hotel rooms over the past 12 months will mean bad news for hotel operators. The exception will be Canberra, where government-related travel will help support the market.

Industrial property

More than five million square metres of industrial space were added in 2007 and 2008, but the stalling economy means demand for this additional space has dropped away and 2009 looms as a bad year. “The economic downturn will impact heavily on the industrial property market,” ANZ says. “Although there may be some benefit for manufacturers from a lower Australian dollar, weak demand conditions both domestically and globally will continue to impact performance.”

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