A further slowing in growth
Australian housing market sentiment (measured by NAB’s Residential Property Index) fell noticeably in the June quarter after climbing to a 3-year high in March.
The NAB Residential Property Index dropped 17 points to +14 and currently sits at its lowest level since mid-2016.
Sentiment fell in all states led by SA/NT. Sentiment was also noticeably lower in NSW and Victoria, but they were still the most upbeat states.
But more modest falls in QLD and WA saw the gap between the best and worst states narrow.
Overall confidence levels also turned down in the June quarter, with the Index expected to rise to just +23 in the next year (down from +38) and to +35 in two years’ time (from +40).
According to NAB Group Chief Economist Alan Oster, “Falling confidence reflects weaker expectations for both house prices and rents.”
Average survey house price expectations fell to 0.6% in the next year (from 1.8%) and 1.0% in two years’ time (from 2.0%).
“Property experts lowered their expectations in all states, except WA, with the biggest cut backs in Victoria and to a lesser extent in Queensland and NSW” said Mr Oster.
Queensland and NSW are expected to lead the country for house price growth in the next 12 months.
But WA is expected to re-emerge as the best state after Queensland in 2 years’ time, with Victoria the weakest.
“Rents are also expected to slow, but tipped to outpace house price growth. This suggests that yields may start widening after a long period of compression, especially in Victoria and NSW” said Mr Oster.
The survey results indicate that while first home buyers were more active in both new and established property markets in the June quarter, local investors retreated from the market.
“Clearly, tougher measures on banks announced by regulators to rein in investor lending are being felt in this segment of the market” said Mr Oster.
In contrast, the share of foreign buyers in new property markets increased to 11.6% (10.8% in Q1), driven largely by Victoria where they accounted for around 1 in 5 (20.8%) new property sales.
“Foreign buyers continued to play a role in Australian housing markets in the June quarter despite China’s crackdown on capital outflows into overseas property and a raft of new restrictions and taxes on foreign ownership introduced in the 2017/18 federal budget” said Mr Oster,
NAB’s forecasts on residential prices
After multiple years of very strong growth, Australia’s housing market appears to be entering a cooling phase – although evidence points to an orderly adjustment rather than a sharp deterioration.
According to Mr Oster, “Our expectations around subdued wages growth remain suggesting affordability will be a major constraint on the market, especially if credit conditions continue to tighten. This along with record levels of housing construction activity (mainly apartments) and moves to limit foreign demand for housing will likely limit the potential for future price gains.”
“However there are still a number of positive elements supporting the market, which will likely see an orderly adjustment rather than a sharp correction. Interest rates are still quite low, despite recent increases, and pent-up demand for housing remains quite large in some markets, especially Sydney and Melbourne” added Mr Oster.
That said, much softer market sentiment in the NAB Survey and weaker than expected price outcomes in recent months has prompted us to revise down our 2017 forecasts.
House prices are forecast to rise 5% (previously 7.2%) in 2017 unit prices 3% (was 6.8%). Modest growth of 4.3% for detached houses and -0.3% for units is forecast for 2018.
By capital city, house price growth is forecast to remain strongest along the eastern seaboard in 2017. Sydney and Melbourne will both see solid, albeit slower, growth in prices. Brisbane, Adelaide and Hobart will also cool, while Perth will remain very weak. These trends will broadly continue into 2018, with growth in Sydney and Melbourne returning to more sustainable levels.
The under-performance seen in the apartment market is also set to continue, reflecting the heightened supply concerns and uncertainty around the future of foreign demand. Sydney and Hobart units are expected to do relatively well in 2017, but all other markets are expected to decline. Most cities will be fairly flat in 2018, while Melbourne and Brisbane will likely see additional declines.
About 260 property professionals participated in the Q2 2017 survey.
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