Next year could be the best year in a decade to buy property

The declining interest rate environment is combining with other factors including a lack of new development and rising rents to create an interesting trend in the real estate market: the clock is being wound back 10 years. 

There are signs of a repeat of the conditions experienced in the early 2000s, when lower interest rates stimulated the real estate market.

In recent years interest rates have moved in an upward direction before remaining steady for the past 12 months. A higher interest rate environment, while keeping inflation under control, adversely impacts the economy and this is where the market has found itself. 

But the Reserve Bank decision to lower the official cash rate could represent a crucial shift in outlook for the economy as a whole and the real estate market specifically. 

Ten years ago lower interest rates stimulated the property market, and we find ourselves facing similar fundamentals now. Values have shown recent declines but should stabilise in time, creating a soft market that presents attractive opportunities for first homebuyers, upgraders as well as investors to become active again. 

A compelling argument could be made for 2012 being the best year in the past decade to buy residential property. 

Laing+Simmons forecasts interest rates to decline by up to 1% by mid-2012, which should translate to an increase in consumer spending and stabilisation of property values. 

At a broader economic level, higher interest rates in recent times have had the effect of reducing consumer spending as people turned their focus to increasing their savings and reducing their household debt. 

Should a declining rate trend materialise we expect to see consumer spending increase and property values stabilise, particularly for lower priced properties close to the city. 

Property prices, which have been flat or declined over the last four to six months, should again show growth in the medium term as a number of influences converge. 

The long-term low supply scenario in Sydney, driven by a significant period of inactivity stemming from a continued lack of finance for developments, should ensure residential rents keep rising. 

Additionally, with the latest REINSW figures showing rental vacancy in Sydney is just 1.5%, the fundamentals for investors remain strong. 

For developers, the reduced availability of credit could necessitate substantial pre-sales be achieved to secure finance, compounding the contracted supply situation. These constraints should see values resume an upward trend over the medium term as population growth continues unabated and demand further outweighs supply. 

More immediately however, we can expect values to stabilise. There will be pockets where values will rise comparatively quickly, particularly in lower priced new residential developments close to the city, again driven by the lack of supply of properties at lower price points in good locations. 

Declining interest rates, stabilising values, lack of new supply, rising rents and a low vacancy rate are converging to create a most attractive environment for property purchases – a scenario the market has not experienced for 10 years.