A lengthy federal election and interest rate rises may have slowed Canberra’s progress as 2010 drew to a close, but its continuing undersupply will fuel slow and steady growth this year.

Activity in Canberra’s property market may have slowed somewhat towards the end of 2010, but this is one property market that largely managed to escape the volatility that affected much of the country last year.

“Canberra’s been a very strong market for a while. It has very low unemployment rates, it’s the nation’s capital and it gets a lot of support from its political base. Growth did fall off during 2010, and this is all about first homebuyer activity and interest rate rises knocking sentiment a bit on the head,” explains APM senior economist Andrew Wilson.

PRDnationwide’s research director Aaron Maskrey sees a quiet year ahead in terms of buyer activity, and predicts that capital growth will drop to around a modest 6% per annum.

“Activity levels are unlikely to pick up until the end of 2011. With interest rates set to steadily increase over 2011, potential buyers will not feel rushed to return to the market,” he says.

Wilson, however, sees the Canberra market hotting up well before the end of the year as investors recognise the potential for solid returns.

“I would expect Canberra to continue onwards and upwards more consistently. It’s got a small population base, and is not as reliant as WA and Darwin are on resources. In terms of price growth, it will probably start to rise past the March quarter,” he says. “There are stock shortages in Canberra, so rentals are reasonably high and so is competition for rental properties.”

Real Estate Institute of ACT president Michael Wellsmore also points to the undersupply situation as a major reason why the ACT’s property market should remain steady this year, especially when combined with the territory’s above average per capita income.

“We’ve not suffered the problems that some of the other markets have,” he says. “The drivers here are an undersupply and people with good capacity to service their mortgages.”

In response to the undersupply issue, the Canberra authorities have been releasing land for new developments to get underway, and these new opportunities have been snapped up by investors, says Wellsmore.

With neighbouring Queanbeyan suffering from severe flooding at the end of 2010, investors may be wondering if the recent catastrophic flooding in Queensland will have a knock-on effect in the ACT. Wellsmore points out that the physical effects of the Queensland downpour shouldn’t take hold in Canberra, but that the economic repercussions might be felt.

“The effects of the Queensland floods are unlikely to directly affect the ACT. However, there are the considerations that will arise because of the financial markets being impacted and the availability of building supplies,” he says.

“The increased demand for building materials in Brisbane may be higher now over the next 12 to 24 months. If the increase in activity in Brisbane pushes the inflation button, then of course this may add pressure for interest rates and that would have an effect on the broader property market.”