Housing market sentiment softens as expectations for future price growth and rents are scaled back in most states. Queensland is the exception, replacing NSW as the most optimistic state for residential property and tipped to lead the country for price and rental growth over the next 1-2 years. Foreign buyers more active in new and established property markets in most states, but continue to play a far bigger role in Victoria relative to other states.

The NAB Residential Property Index fell -7 to +10 points in the September quarter – its second consecutive fall – with the index now below its long-term average (+14 points).

According to NAB Group Chief Economist Alan Oster: “It’s not all negative as the overall picture masks some big differences across individual state markets”.

Market sentiment improved notably in Queensland and was less negative in SA/NT. It softened in Victoria and NSW (although they are still the strongest states) and slipped to a new low in WA.

Looking forward, Queensland has replaced NSW as the most optimistic state in the country followed by Victoria. In contrast, WA remains the most pessimistic, but mildly less so than in the last survey.

Expectations for national house price growth over the next 1-2 years were scaled back to 1.5% and 1.8%. However, this also masked a notable improvement in Queensland, which is now predicted to be the leading state for capital growth in the next few years (2.6% & 3.4%). In contrast, expectations were cut back in NSW (2.2% & 1.8%) and Victoria (1.9% & 1.9%), and remain weak in SA/NT (-0.2% & 0.5%) and WA (-0.7% & 0.4%).

“The survey also suggests that yield compression will continue as capital growth outpaces rental growth in all states” said Mr Oster.

Foreign buyers were more prominent in Australian housing markets in the September quarter, accounting for around 16% of total demand in new housing markets and 9% in the established housing market.

According to Mr Oster: “Foreign buyers were notably more active in Victoria, where they accounted for just over 1 in 4 of all new property sales and around 1 in 7 sales of established homes”.

By property type, the Survey estimates foreign buyers accounted for 19% of all new apartment sales and 14.9% of all new house sales in the September quarter.

Foreign investors continue to play a far bigger role in Victoria than any other state, accounting for 28.5% of total demand in the new apartment market (28.3% in Q2) and 26% of new houses (16.7% in Q2).

In established property markets, foreign buyers accounted for around 11.3% of all apartment sales and 9.5% of house sales.

“Again, these ratios were significantly higher in Victoria, where foreign buyers accounted for around 1 in 5 of all established apartment sales and just over 1 in 6 houses”, said Mr Oster. Interestingly, more foreign buyers purchased higher priced properties in Q3, particularly in NSW and to a lesser extent Victoria. In the apartment market for example, around 58% of foreign purchases in NSW were for apartments valued below $1 million, down from 67% in the previous quarter.

According to Mr Oster, “This may have been influenced in part by continued house price growth in Sydney and Melbourne as well as a weaker Aussie dollar”.

In terms of local buyers, it was encouraging to see greater participation from first home buyers in both new and existing property markets in the September quarter, led by first home buyer owner occupiers.

On a more sobering note, the Survey indicated that tight credit has re-emerged as the biggest (and growing) constraint for new housing development, with employment security still considered the biggest impediment to buying existing property in most states, especially WA which is facing considerable employment challenges as the state mining investment boom unwinds.

NAB Economics is forecasting average national house price growth of 9.1% over 2015, which is much higher than expected earlier in the year. Capital growth will be led by Sydney and Melbourne, with house price growth forecast to be 14.6% and 15.2% respectively over 2015. Modest gains in 2015 are also forecast for Brisbane (4.4%), while Adelaide (-0.4%) will be broadly flat. In Perth, house prices are expected to fall (-4%), with the slowdown in the mining sector and associated softening in population growth playing a negative role in the local market.

“In an environment where income growth continues to be modest, these rates of growth are unlikely to continue, suggesting price growth will slow in 2016” said Mr Oster.

Additionally, regulatory changes to address perceived risks in housing credit (particularly investor credit) are likely to have at least some impact on housing demand (even if only at the margin).

The forecast for average national house price growth in 2016 has been lowered to 2.3%, from 3.0%. A strong supply response in the apartment sector, however, suggests a weaker outlook for this market, and greater reliance on foreign buyers adds a degree of unpredictability to the outlook.

In 2016, the slowdown in average national house price growth to 2.3% is largely driven by a moderation in both Sydney and Melbourne prices growth. NAB Economics expects house price growth to decelerate in Sydney to 1.2%, while price growth in Melbourne will ease to 3%. Brisbane is tipped to see the fastest house price growth (4.5%), and the Adelaide market is expected to improve (2.4%). Perth will remain weak, although price declines are forecast to ease (-1.2%).

For further analysis download the full report.

• Quarterly Australian Residential Property Survey Q3 2015 (PDF, 316KB)