House prices in Australia yet to bottom out, property institute warns

Residential property prices in major cities in Australia have yet to bottom out but Sydney is likely to recover first, according to the latest industry survey.

Most cities will see property markets reaching bottom in 2010 says the latest Australian Property Directions Survey compiled by the Australian Property Institute.

Leading the recovery in late 2009 however would be the residential sector in Sydney, followed in 2010 by the residential sector in Melbourne and Brisbane, and the retail sector in all three cities.

It predicts that industrial property would remain stagnant, while commercial property would regain strength first in Sydney, followed by Melbourne, as Brisbane commercial property continues to decline.

The survey gauges sentiment among property industry professionals including financiers, analysts, fund managers and valuers.

Of significance was that the majority of respondents said yields across all property sectors would increase, not due to rental shortages but because prices would drop as the higher price of risk capital was factored in.

'This is due to the risk weighting of capital, chiefly with higher interest rates and availability of funds,' said Phil Bennett API Research Committee Chairman. 'Before, there was a very narrow band between the official rate and yields,' he added.

'That is now starting to increase, to reflect the true risk that goes with property which people to a large extent were leaving forward in previous years. The result will be a potential for retail, industrial and commercial properties to decline in value over the next 12 months, as this new risk weighting is applied.'

Other survey findings included a continued flight of capital from both listed and unlisted property vehicles, although the latter was considered less exposed to current volatile equities sentiment.

Most respondents thought it would be unlikely that residential property would outstrip equity market returns any time soon, although on a five-year outlook the chances narrowed to about even.

Growth in retail, industrial and commercial capital values was considered to be incapable of matching increases in the consumer price index over the next 12 months.

Mr Bennett said it was also likely that the availability of industrial and commercial space would increase, as tenants moved toward sub-leasing to rein in costs.