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The recovery in residential markets across Australia through the second half of 2009, underpinned by low interest rates, rising rents, and first home buyer incentives, resulted in solid price rises across the capital cities. Activity, led by first home buyers at the bottom end of the market, has been flowing through to increased demand from upgraders and investors into higher price points.

However, there is still some uncertainty: the official cash rate has increased by 150 basis points to May 2010 (and higher rises have been pushed through by the banks), with further tightening anticipated through 2010. In addition, there is evidence that first home buyer demand is rapidly weakening with the expiry of the First Home Owner's Grant Boost Scheme at the end of 2009. Is the increased demand from upgraders and investors enough to maintain momentum in purchaser activity? What are the prospects for overseas migration and population growth? How much will rising interest rates impact on economic conditions and affordability? What does this mean for the price outlook over the next three years by capital city?

How well will the residential market hold up in the face of a deteriorating economic outlook and sentiment?

• What is the outlook for overseas migration and underlying demand in the current economic environment?
• How will the timing of interest rate rises impact on affordability?
• How will the tight rental markets influence rents, yields, and subsequently investor demand?
• Can the strong price growth at the end of 2009 continue?
• How will prices react to rising intrest rates, and the expiry of the first Home Owners Grant Boost Scheme?
• Which regions offer more positive prospects for capital growth?

Kirrily McNamara

PH: +61 2 9959 5924