The Australian housing market ended 2018 on a very weak note with the NAB Residential Property Index sinking to a new survey low – down 11 to -20 points. Although market sentiment weakened across the country, the overall index was pulled down mainly by VIC and NSW, as downward pressure on prices intensified in Sydney and Melbourne. Confidence also fell well below average levels, suggesting market momentum may ease further.

Property professionals now anticipate much sharper price falls in NSW and VIC over the next 1-2 years, but prices are also expected to fall or remain flat across the rest of the country. The outlook for rents was positive for all states (bar NSW) suggesting yields should trend higher. VIC and NSW (where house prices are falling fastest) are likely to see the biggest yield improvements.

FHBs and owner occupiers took up the slack in new and established housing markets in Q4 as investors – both foreign and domestic – continued to retreat. The crackdown on credit and tighter lending restrictions also continued playing out in new and established housing markets, with property professionals in all states citing credit as the biggest constraint on new housing development and the biggest impediment for buyers of established housing.

NAB’s view is that house prices are likely to decline further over the next year or so – seeing peak-to-trough declines of around 15% in Melbourne and Sydney (although falls in the latter may be marginally higher). Perth is likely to see some further small declines, while the remaining states will remain largely flat. We expect the declines to remain orderly and see price movements on the East coast to date as a healthy correction to the prior large run-up in prices. The adjustment to date has occurred against a relatively healthy macroeconomic back drop and this is likely to continue to be the case. That said further tightening in credit conditions and weaker price expectations in the investor market could likely further weigh on prices.