Residential property prices to rise 5% in 2013 but shares a better bet than property: Shane Oliver

AMP Capital chief economist Shane Oliver predicts property prices will rise by between 4% and 5% in 2013 spurred on by lower mortgage rates, but expects only modest returns for property investors compared with other asset classes.

Oliver says property investors can expect returns of around 6% from their investment properties over 2013, compared with returns of 2% in 2012 and a loss of 4% in 2011, but well below expected returns for both listed property (12%) and unlisted property trusts (9%).

Oliver expects the cash rate to fall what would be a record low of 2.5% next year as a result of initially subdued economic growth as “mining slows and mining slows and non-mining is slow to pick up”, with unemployment set to rise to 6%.

“Against this backdrop the RBA is likely to cut rates further to 2.5% in order to push bank lending rates down closer to past cyclical lows. However, as the impact of rate cuts starts to feed through with normal lags, growth should start to improve by year end.

“Overall we see growth around 2.5%, but this is masking a second half upswing; inflation remaining benign; and the cash rate falling to around 2.5% in the first half."

He says the main risk to the Australian economy is that the non-mining sectors – housing, retailing, tourism, etc – take longer than expected to pick up pace, leading to a sharper slowdown in growth beyond the 2.5% we are expecting.

“This could occur, for example, if rising unemployment triggers a desire on the part of households to more rapidly reduce their debt levels. This could see the RBA cut the cash rate to 2% or below,” he says.

But Oliver says he remains cautiously optimistic about 2013, with historical recession patterns suggesting a continuation of the global recovery for the next three years.

His outlook on the property market also appears more bullish when compared with comments he made in July, when he said Australian property prices were still overvalued by around 10% to 15%, though down from earlier AMP estimates of a 30% overvaluation.