The NAB Residential Property Index rose sharply in Q2, underpinned by rising home prices and solid rental growth. Confidence levels also bounced, with recovery expectations now much firmer. New survey findings point to substantial undersupply of rental property across much of the country. New research also reveals that 2 in 3 property professionals believe fast tracking planning permissions and developments would be most effective in reducing Australia’s housing shortage, 6 in 10 financial incentives (such as low interest rates, tax incentives), and 1 in 2 creating incentives for older Australians to downsize, building more affordable or public housing, allowing more sub-divisions, or making negative gearing more attractive.

NAB has revised up our outlook for property prices with the demand/supply imbalance offsetting the drag from reduced borrowing power and affordability as rates rise. We see the RBA lifting rates to 4.6% by September, then staying on hold until 2024. That sees property prices rise by 4.7% this year and around 5% next year as rate cuts begin to add some support.

Survey highlights

• The NAB Residential Property Index bounced sharply in Q2, supported by rising home values in most capital cities during the quarter, and solid rental growth amid below average vacancy and supply shortages. Overall, the Index climbed to +33 pts in Q2 (from +9 pts in Q1 and +29 pts at the same time last year) and printed well above the long-term survey average (+17 pts).
• Housing market sentiment improved in most states in Q2, and was highest in WA (+81 pts), with solid uplifts also recorded in SA (+53 pts), VIC (+29 pts) and NSW (+20 pts). It remained very weak in the ACT (-100 pts) and TAS (-11 pts) – but from a smaller sample.
• Confidence also lifted sharply with recovery expectations now much firmer. Overall, NAB’s one-year confidence measure lifted visibly to +46 pts, with the 2-year measure also stronger at +48 pts, with both confidence measures printing above survey average levels for the first time since late-2021/early-2022. Confidence in the next 12 months is highest in WA (+79 pts) and the NT (+75 pts), and improved most in VIC (+51 pts).
• Average survey forecasts for national house prices for the next 1-2 years printed positive in Q2 for the first time since Q1’22. Property professionals now see national home values rising 0.6% in the next 12 months, with longer-term expectations at 1.7%. Expectations for the next 12 months improved across the country led by WA (3.2% and still sliding in TAS (-1.5%).
• With Australia still experiencing very low rental vacancy and strong demand for rental property (and an overwhelming number of property professionals assessing rental markets in their local areas as undersupplied), rental expectations remain elevated. The average survey forecast in the next 12 months and in 2 years’ time was unchanged at a healthy 4.0%. With rental growth outpacing home values, gross rental housing yields should also continue to rise. Survey expectations for rents are positive in most states over the next 1-2 years with VIC leading the way (5.4% & 5.5%).

NAB’s view

We have revised up our expectation for dwelling prices based on the recent resilience and outlook for strong housing demand in the near term, while supply growth continues to be challenged by higher rates and supply side pressures. That said, we see the pace of price growth slowing in H2 2023, with prices remaining broadly flat but ending the year around 4.7% higher based on price gains in the year to date.
More broadly, we expect economic growth to have slowed further in Q2 and see flat outcomes for GDP in the second half of the year. Household consumption is the big driver – with the impact of rates and inflation continuing to weigh on spending. Slower growth will likely see the unemployment rate drift up to around 5% by the end of 2024 – though this should ease some wage pressure in the labour market. Inflation has peaked, but how quickly it moderates will be important for policy from here. Policy is now clearly slowing activity, but inflation is expected to remain above target until 2025 – we continue to see two further hikes taking the cash rate to 4.6% by September, with little moderation in the quarterly pace of inflation expected in the near term. With the RBA beginning to normalise rates in 2024, we see some support for dwelling price growth – pencilling in a gain of around 5% over the year.