House prices will be flat but you can bet on rent rises

IT'S that time of year again where the old crystal ball comes out and we do some gazing for 2011. The great thing about being an analyst is that the media rarely holds you to account regarding past predictions. So in the spirit of accountability, these predictions were made here last year for 2010:

Sydney's house prices would record about 8 per cent growth with the market slowing due to withdrawal of the First Home Owner Grant and higher interest rates.

Building approvals to surge, with a good year for developers.

Upper end of the market likely to outperform the lower end.

Affluent end of the market likely to record a rapid decline in vacancy rates, while lower end would remain very tight.

Interest rates must not go over 8 per cent otherwise it's curtains for the Sydney market.

The market has indeed slowed to a trickle. It is now safe to state real estate prices in Sydney have slightly fallen in the second half of the year. However, due to the surge in the first half, the annual rate of growth for this year has been close to the 8 per cent mark.

Property developers have had a good year and there was a surge in building approvals in the first half of the year.

The jury is out on whether the upper end of the market has outperformed this year. True, it has had a better year than 2009; however we are still recording patchy performance for properties over $2 million.

New predictions

Vacancy rates to remain tight for most of the market and that means at least 7-9 per cent plus rises in rents for 2011.

Building approvals to soften as investors largely stay on the sidelines following very high interest rates.

Outer ring in Sydney, particularly the south-west and west, will outperform in rents and capital growth. The affluent end of the market is going to underperform once again. And watch out for properties around the $1 million mark - they are likely to be discounted most.

We remain with the firm conviction that the average home loan lending rate must not go over 8 per cent. If it does, that would hit the Sydney market hard, depending on how long it would stay at those levels.

Our overall forecast is that the Sydney market is likely to record flat to moderately falling house prices for 2011. We believe it is going to be somewhere between a 0-4 per cent decline.

It is clear now that the Reserve Bank is happy for the housing market to have a correction.

Early this year, I did not believe the RBA would risk a housing bust so early in the economic recovery. However that was one prediction I did get wrong. After all, there was already a housing bust taking place outside Sydney which presumably the RBA was aware of, and yet it lifted rates.

Louis Christopher is the managing director of SQM Research,, and head of property at Adviser Edge.