The great house price debate - which side will be proven right in 2012?

It’s just about over – the year of the great Australian house price debate.

If there were a prize for the number of diverse viewpoints on the future of our housing market, 2011 would claim it.

The Super-Pessimists, like Steven King ….oops, Keen, and Harry Dent, predicted prices would plummet 40 to 50%.

The Economist proclaimed the market 56% over-valued, while Money Morning prophesied a nightmare “100-year slump”.

And as if that weren’t enough to put a serious dent in confidence, the Pessimists, like the OECD and Goldman Sachs, did further damage with reports of house prices up to 35% over-valued.

Groups like Morgan Stanley and Rismark – we’ll call them the Stagnationists – indicated we will all be treading water.  They anticipate longer-term flat prices.

SQM Research forecasts little change at all.

But the range of opinions didn’t stop there.

Optimists, like Investment Property Central, focused on the stability of property but ignored any effects from the GFC.

And the Super-Optimists, like QBE/ BIS Shrapnel, forecast faster economic growth and gains of anywhere from 16 to 20% in some of our capitals over the next three years.   We wish!

So, what do we think?

Well, like the Stagnationists, we anticipate very little movement – at least for the immediate future.

In a nutshell, we expect a period of fairly flat growth for the next several years, on the eve of modest improvement.

Prices should rise, but they will be subdued, and they should increase on the back of rents.

One hurdle – our recent drop in population growth – has caused underlying demand for housing to drop by a third across Australia since 2009.  Queensland and Victoria have experienced even greater falls.

Thus 2011-12 will be a slow year for new housing starts – just 135,000 are expected to be built over the next 12 months, a drop of 15% over the previous year.

Assuming stable interest rates for the next six to 12 months, this level of new supply would comfortably cater for the expected increase of about 325,000 in the Australian population next year.

Our forward estimates are for, on average, between 150,000 and 160,000 new housing starts each year over much of the next decade.

A fall in interest rates would have a positive impact on new housing starts, but without a rise in population growth, there is really little need to build more dwellings.

Queensland’s outlook, however, is beginning to look a little sunnier.

The state’s growth is on the rise, boosted by coal output and major resource development.

And the number of full-time jobs is increasing which, ultimately, will translate to higher levels of migration, stronger housing demand and eventually price (and rental) growth.

But patience is crucial.

To recap, we look to some improvement in nominal terms, but in real terms, expect a period of flat growth.

Improvement should follow, within a small positive band of 2% to 4% per year over the next several years.

Wishing you good health, good cheer, and growing confidence throughout the new year.

 Michael Matusik is the director of independent property advisory Matusik Property Insights. Matusik has helped over 500 new residential developments come to fruition and writes the weekly  Matusik's Missive.