NAB’s Residential Property Index recovers some lost ground in Q1 2023 but is still relatively weak as house prices continue to slide through the early part of the year. FHBs appear to have pulled back heavily in new housing markets, as foreign buyers begin to re-emerge as key players, particularly in NSW. NAB sees a further small fall in property prices in the near term, before prices rise in 2024 as rates fall. Rates are likely to continue to weigh, though strong population growth, a tight rental market and healthy labour market are key offsets.

Survey highlights

The NAB Residential Property Index recovered slightly to +9 pts in Q1’23 (+5 pts in Q4’22), but is still well below the survey average (+17 pts) and down sharply from +58 pts at same time last year. With home values continuing to slide across the country, the positive index result is being supported by solid rental growth.

Housing market sentiment is currently highest in the NT (+67 pts), WA (+51 pts) and SA (+41 pts). In VIC, sentiment turned positive (+5 pts) after falling in the previous 2 quarters, with the QLD state index steady (+6 pts). In NSW, where housing values have fallen most in the past year, it moved deeper negative (-7 pts).

Confidence levels improved a little in Q1, but continue to point to a relatively slow housing market recovery over the next few years. NAB’s one-year confidence measure lifted modestly to a well below average +15 pts, with the 2-year measure also still printing at a well below average +33 pts.

The average survey forecast for national house prices in the next 12 months is broadly unchanged at -2.3%. Longer-term expectations are also largely unchanged at -0.3%. Expectations for the next 12 months are highest in the NT (1.5%) and WA (1.2%), with house prices falling across the rest of the country, led by VIC (-3.6%), the ACT (-3.3%) and NSW (-3.2%).

With Australia still experiencing a period of very low rental vacancy and high demand, rental expectations remain elevated and well above survey average levels. The average survey forecast is for national rents to grow 4.0% next year and in 2 years’ time. With rental growth continuing to outpace dwelling values, gross rental yields should also continue to rise. Expectations for the next year are positive in all states, led by WA (4.7%), the NT (4.6%), VIC (4.5%), SA (4.3%) and NSW (4.2%).

First home buyers (FHBs) pulled back in new property markets during Q1, with their share of total sales dipping to a near 6-year low 35.7%. This was attributed to a sharp fall in the market share of FHB owner occupiers to a 5½ year low 23.7%. The overall market share of foreign buyers in new property markets however rose to 7.9% in Q1, underpinned by steep increase in NSW to 16.2% – the highest read since Q1’15. The share of foreign buyers in VIC however fell to a 2-year low 4.0%.

Construction costs are still being highlighted as the biggest constraint for new housing development in Australia, and considered to be a “very” significant constraint. But with the official cash interest rate lifted a further 25 bps in both February and March 2023 to a near 11-year high 3.60% (and widely tipped to continue rising), interest rates are now also viewed as a “very” significant constraint nationally.

In established housing markets, buying activity continued to be dominated by owner-occupiers (net of FHBs), accounting for 46.1% of all sales. The overall share of FHBs in established housing markets slipped to 31.9%, but continues to trend slightly above the survey average.

Rising rates are also becoming a bigger constraint for buyers of existing housing across the country – and now also considered a “very” significant constraint. Rising rates are also viewed as the biggest constraint for home buyers in all states (led by NSW and VIC). WA is the exception where lack of stock is having the biggest impact on buyers. Access to credit is the next biggest hurdle for buyers, and also deemed “significant” in all states (bar WA).

NAB’s view

Our view is that house prices see a further small fall from here, around -3.5%, and then a period of flat prices which will see prices end the year around 4% lower. This would be a peak-to-trough decline of around 12% compared with our previous expectation of a decline of around 20%. The key driver of the decline to date in dwelling prices has been the very big reduction in borrowing power as rates have risen. However, stronger population growth, a tight rental market and strong labour market are key offsets.
More broadly, we see the economy slowing from here, as the impact of higher rates and inflation weigh on household consumption. This will see a deterioration in the unemployment rate, albeit from a very low base, and ultimately see wage growth remain consistent with “at target” inflation. Therefore, with global factors continuing to wane, inflation will continue to moderate and the RBA is likely to remain on hold after pausing its sequence of cash rate increases in April at 3.6%.