Below trend growth to continue
The NAB Residential Property Index fell for the third straight quarter as the downturn in national housing prices deepened
Though prices fell across much of the country, a positive Index result continued to be supported by strong growth in housing rental markets. 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 19% in property prices.
The NAB Residential Property Index fell for the third straight quarter in Q4 as the downturn in the national housing prices deepened. Overall, the Index closed the year at a 2-year low +5 pts (+9 pts in Q3), and down heavily from +58 pts at the start of 2022. Though housing values fell across most of the country through Q4, the positive index result was supported strong rental growth.
Sentiment fell across the country in Q4, except in the ACT though was still lowest (-50 pts). It was also negative in VIC (-6 pts) and NSW (-6 pts) were house prices in Melbourne and Sydney fell most steeply over the course of 2022. SA (+21 pts) led the way, with positive outcomes also recorded in the NT (+10 pts), QLD (+6 pts) and TAS (+6 pts). The WA state index was neutral (0).
Confidence levels among surveyed property professionals still point to a relatively slow housing recovery in the next few years, with NAB’s 1-year (+11 pts) and 2-year (+25 pts) confidence measures basically unchanged at well below survey average levels. Confidence levels in the next 1-2 years are highest in WA and lowest in the ACT.
The average survey house price forecast for the next 12 months was broadly unchanged at -2.5%. Though still negative, property professionals were more upbeat about the longer-term outlook, and are now forecasting a more modest fall of -0.5% in the following year (-1.4% in Q3). Property professionals see modest growth in WA (1.3%), the NT (0.4%), TAS (0.2%) and SA (0.1%) in the next 12 months, with further falls tipped for VIC (-4.0%), NSW (-3.3%), QLD (-2.7%) and the ACT (-2.2%).
But with Australia currently experiencing a period of very low rental vacancy, surveyed property professionals expect rental growth rates to remain relatively high over the next 1-year (3.1%) and 2-years (3.3%). Rents are expected and grow in all states and territories except the ACT.
New research suggests residential rental shortages will remain problematic over the next few years, with 6 in 10 property professionals indicating it will be a “significant” issue in their area in the next 12 months, and 5 in 10 in 2 years’ time.
With official interest rates lifted in each month of Q4, and tipped to rise further in 2023, higher rates (and rising construction costs) were the key detriments to housing market developments in Q4. Higher rates were also the biggest (and growing) constraint for buyers of existing property across the country.
Affordability is often touted as key roadblock to home ownership for FHBs, with stamp duty a key contributor. To help address this, the NSW Government recently introduced changes to stamp duty where FHBs will be able to choose between paying an annual land tax or an upfront stamp duty on properties. In this survey, property professionals across the country were asked if this policy change was implemented Australia-wide, would it increase demand from first home buyers? Overall, they think the impact on demand would be “moderate”.
Our view is that the housing market will continue to adjust to higher interest rates as 2023 progresses with prices declining by another 11% this year across the capitals after falling by 7% over 2022. Overall, the equates to a peak to trough decline of 19% following the peak in prices mid last year. We still see the declines as orderly, primarily reflecting reduced borrowing power and affordability constraints rather than an over-supply of housing. Indeed, the rebound in population growth alongside a healthy labour market and very tight rental markets are all offsetting factors at present.
More broadly, we see the impact of interest rate rises on the rest of the economy becoming more evident in H1 2023. While spending growth has certainly slowed, the consumer has remained resilient to both higher inflation and interest rates. We see flatter outcomes for consumption in 2023, slowing GDP growth to below 1%. We also expect the unemployment rate to drift up over the next two years. We continue to see the RBA lifting rates at each of the next two meetings, before pausing at 3.6% through the rest of 2023 with some easing in rates likely in 2024.
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