What you should know about the risks of the property market

Australian house prices continue to rise amid warnings of higher interest rates and a property downturn. What should property investors consider in 2017?

Talking property in Australia is a little like talking sport. Everyone supports their own side.

In the Sydney market, if you are a homeowner, there’s nothing you enjoy more than reading about booming house prices. If you are a first homebuyer in the same market, you are hoping for a crash that makes property more affordable.

Away from Australia’s East Coast, homeowners and investors in Adelaide and Perth get frustrated watching stellar Sydney and Melbourne prices, and want some of the gain for themselves.

Why property prices could plunge

There is no shortage of opinions and predictions on which way the market will move in 2017.

Some are dire warnings about imminent collapse and a burst bubble, based around the perfect storm: mass defaults by apartment buyers, rising interest rates which force fire sales from people who have overleveraged on low rates, a faltering economy and a glut of new dwellings on the market.

At Deloitte Access Economics, partner Chris Richardson predicts Melbourne and Brisbane apartment market prices will drop by as much as 15 per cent by 2019.

Some market bears are less concerned. Economic forecaster BIS Shrapnel sees house prices falling nationally over the next three years, driven down by weaker investor demand and too many homes, while the Reserve Bank of Australia (RBA) has warned that oversupply could put the market under pressure.

Property prices may continue to rise

Not everyone sees prices falling. At property analyst Louis Christopher’s SQM Research, the 2017 forecast is for gains of as much as 18 per cent in Sydney and 17 per cent in Melbourne if the RBA cuts official interest rates by another 0.25 per cent to 1.25 per cent by mid-2017.

At the National Australia Bank (NAB) there is a different view, which sits somewhere in between. NAB chief economist Alan Oster sees the long boom in Melbourne and Sydney coming to an end, and a 2017 revival of prices in Adelaide and in Brisbane, where there is more demand than supply.

The NAB, he says, forecasts that national house prices will increase by 1 per cent across the board in 2017 as the market holds its ground.

Oster does, however, see a two-speed market: established homes and apartments. Melbourne and Brisbane are both overbuilt with apartments and Perth also has a surfeit of supply.

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