What property prices will do over the next five years

Property prices could rise in the next five years, as choked supply and ongoing demand provide a springboard for growth, economists said.

A construction slump, an expanding population, tight job markets and wage increases are the perfect mix for price gains across most capital cities – barring any unforeseen shocks.

Property prices are expected to rise over the medium term.Credit: Rhett Wyman

However, rates of price growth, especially in Melbourne, are forecast by economists to be lower than in the past five years, during the period of ultra-low interest rates.

In Victoria, government debt, investor taxes and higher unemployment than other states are expected to dampen any upturn.

However, Melbourne’s low base does generate the prospect for increases.

Melbourne’s “mild” market, which grew 8.2 per cent over the past five years compared with Sydney’s 28.2 per cent, according to CoreLogic data, make it ripe for a comeback, CoreLogic executive research director Tim Lawless says.

“I would be surprised if Melbourne did not overachieve on that recent five-year period,” he says.

“It has built up quite a strong, competitive affordability advantage, and it does not have the same affordability constraints that Sydney does.

“Even though there are headwinds around high taxes and what has been generally a fairly weak migration profile – outside of overseas migration – I think Melbourne will probably step up in terms of its five-year growth rate.

“At a time when affordability is already very stretched across Sydney, I would probably say it won’t happen, but it is certainly not off the cards, especially given the fact we are not seeing many signs of a supply response just yet.”

The outlook could vary by city.Credit: Paul Jeffers

Ray White Group chief economist Nerida Conisbee describes these conditions, especially in inner-city Melbourne and Sydney suburbs, as the “missing middle”.

They are postcodes where residents don’t want high density, but appealing options such as townhouses will be essential in the next five years to temper house prices.

Capital cities other than Sydney have registered strong apartment growth in the past, but it is a “temporary” phenomenon that is uncertain to be repeated, Lawless says.

“Over the medium to long term, the scarcity of detached housing will see it outperform apartments,” he says.

“But I think there is going to be an ongoing shift in demand towards the multi-unit sector, which includes town homes all the way through to highrise, simply because they do offer a much more affordable price point.

“Logically, not everyone can afford to buy a house in a desirable location.”

The lag on the federal government’s target to build 1.2 million homes by 2029 will mean any chance of price moderation, as a result, will come later in the five-year timeframe.

Most of those built will be apartments, Conisbee says, and have no bearing on house prices in established suburbs.

Those new dwellings will only contribute to a decrease in apartment prices, mainly around transport hubs earmarked for increased density in Sydney and Melbourne, Conisbee says.

But she agreed that for Victoria in particular, a lot has to happen before price growth catches up.

Potential interest rate reductions are not expected to have as much influence as these other factors.

The 10-year average for the cash rate, before COVID-19, was 2.55 per cent, CoreLogic figures show.

Lawless says that even if rates stick to an above-average level, it is unlikely to have major impact.

“There are other tailwinds in the market that will promote some level of growth,” he says.

Brisbane is the one to watch over the next five years.

LJ Hooker head of research and economics Mathew Tiller says Olympic Games infrastructure and continuing internal migration will bolster prices.

“Most capitals will see pretty good price growth, purely because of the supply-demand imbalance, but I think Brisbane and south-east Queensland will be one of the top performers purely because of their economic drivers,” he says.

An external factor is fears of a US recession.

A five-year forecast takes in the whole of Donald Trump’s presidential term.

House prices could be propped up by Australians taking their money out of a rocky sharemarket and instead investing in bricks and mortar, Conisbee says.

Tiller says troubles in the US economy and its flow-on effects could give the Reserve Bank cause to not cut the official cash rate as much as anticipated.

“Given the outlook of what is going on globally, I think the RBA will be a little more cautious in order to keep the powder dry, so if there is some kind of economic shock or downturn over the next few years, they have that ammunition in the bag to cut rates more,” he says.

“Cutting rates too early and then a global recession happening means they won’t have anything left in the bag to stimulate the economy.”