NAB continues to see an ongoing adjustment in the property market as interest rates rise – and still expect to see a peak to trough fall of around 20% in property prices.

Survey highlights

National housing market sentiment fell for the second straight quarter in Q3 as the downturn in the national housing market gathered speed and spread wider. Overall, the NAB Residential Property Index fell to +9 pts (+29 pts in Q2), and drifted below the survey average (+17) for the first time in 2 years. The index is now being mainly supported by a strong home rental market.

Sentiment fell in all states in Q3, except WA (+58 pts), but remained highest in the NT (+75 pts). It fell most and turned negative in the ACT (-75 pts) and TAS (-25), with NSW (-5 pts) and VIC (-2 pts) negative for the first time since Q2 20. Sentiment also dipped sharply in SA (+40) and QLD (+10), but both states were (along with WA) the only areas to report a positive outcome.

Short-term confidence levels sagged further in Q3, with the 12 month measure now at a 2-year low +10 pts. The 2-year measure however ticked up slightly to +25 pts, but is still well below average (+45 pts). WA (+60 pts) is the most confident state in the short-term – and the only state to report an uplift in confidence.

The average survey forecast for national house prices in Q3 was cut to -2.6% in 12 months’ time (previously -1.2%), and -1.4% in 2 years’ time (previously -1.3%). Expectations for the next 12 months were pared back in all states except WA – now forecast at 2.2% (1.4% in Q2). Property professionals have prices falling in VIC (-4.5%), the ACT (-4.0%) and NSW (-3.7%).

The outlook for rents lifted in Q3, and they are now expected to grow by a solid 3.5% in the next 12 months and 3.8% in 2 years’ time nationally. With rents growing faster than house prices, gross yields should improve, with rents out-stripping prices in all states.

With supply chain issues, high raw material prices and labour shortages persisting, construction costs are still seen as the main constraint on new housing development nationwide. Rising interest rates have also overtaken tight credit as the next biggest constraint. With the upswing in rates continuing, property professionals again highlighted rising interest rates as the biggest (and a growing) constraint for buyers of existing property.

Property professionals believe the 3 most important considerations for home buyers when deciding to buy a property are the amount they are prepared to borrow to buy (82%), good local amenities (60%) and the size of the house (57%). New research also finds the rising cost of renovations is having a “quite significant” influence encouraging people to buy fully renovated properties (7.5 pts out of 10), with the extent the use of digital tools has become more important in selling properties also “quite significant” (7.1 pts out of 10).

NAB’s view

The housing market has been adjusting to a higher level of interest rates and will continue to do so in the near-term as the RBA lifts rates further and the impact of the previous rate hikes continues to flow through. Our outlook for property prices is broadly unchanged, with dwelling prices expected to decline by around 20% across the capital cities from the peak in mid-2022. The declines are expected to be broad-based, but led by areas where affordability constraints are most binding. To date, Sydney and Melbourne have led the declines, but prices in other capital cities now appear to have also peaked – and the decline in Brisbane has accelerated.

More broadly the economy and labour market continue to show resilience but are expected to soften under the impact of higher rates and elevated inflation on household budgets. We expect the RBA to lift rates further in coming months, taking the cash rate to 3.1% before pausing to assess the impact of rate increases to date. While the influence of global factors on inflation is expected to wane, domestic factors will become increasingly important – including faster wage growth.