Below trend growth to continue
The NAB Residential Property Index bounced sharply in Q2.
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.
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.
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