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.
The NAB Residential Property Index saw a significant bounce in Q2, as home values rose in most capital cities and rental growth remained strong despite supply shortages and below-average vacancy rates. The overall index climbed to +33 points, well above the long-term survey average of +17 points.
Market sentiment improved in most states, with Western Australia (WA) recording the highest confidence levels at +81 points. Confidence also lifted sharply, with recovery expectations now much firmer. One-year confidence measures increased to +46 points, while the two-year measure rose to +48 points. These levels were above survey average levels for the first time since late-2021/early-2022.
Survey forecasts for national house prices in the next 1-2 years were positive, with property professionals predicting a 0.6% increase in the next 12 months and a longer-term expectation of 1.7%. Expectations for the next 12 months improved across the country, particularly in WA (3.2%), while Tasmania saw a decrease (-1.5%).
Due to low rental vacancy rates and strong demand, rental expectations remain high. The average survey forecast for the next 12 months and in 2 years’ time was unchanged at 4.0%. Gross rental housing yields are also expected to continue rising as rental growth outpaces home values. Rental expectations were positive in most states, with Victoria leading at 5.4% and 5.5% for the next 1-2 years.
The market share of first home buyers (FHBs) in new property markets remained unchanged at 35.9% in Q2. While stronger activity was seen among FHB owner-occupiers (25.2%), sales to FHB investors decreased to a near 2-year low of 10.7%. Sales to resident investors also fell to 15.2% in Q2, much lower than levels seen before the current interest rate cycle began in May 2022. On the other hand, sales to owner-occupiers (net of FHBs) reached a 10-year high of 39.4%, and foreign buyers accounted for 8.5% of the market share.
Construction costs and rising interest rates were identified as the main barriers to starting new residential developments by 8 out of 10 property professionals. Delays in obtaining planning permits and labor availability were also cited as common barriers.
In established housing markets, buying activity was driven by owner-occupiers (net of FHBs), although their market share fell to 45.8%. The share of FHBs in this market increased to 33.3%, and the total share of local investors remained unchanged at 17.0%. The market share of foreign buyers dipped to 3.1%. Rising interest rates were seen as the biggest constraint for buyers, except in WA where lack of stock was considered the most problematic. Access to credit and lack of stock also had a significant influence on buyers, with house prices having a bigger impact in NSW and VIC.
According to property professionals, rental markets in most areas were deemed undersupplied, with 30% saying they were “extremely” undersupplied and 27% saying they were “very” undersupplied. Western Australia, South Australia, and Victoria had the highest number of undersupplied markets, while New South Wales and Queensland had lower numbers.
When asked about the most effective policies to reduce Australia’s housing shortage, property professionals identified fast-tracking planning permissions and developments as the most crucial, followed by financial incentives and incentives for older Australians to downsize. Other suggestions included building more affordable or public housing, allowing more sub-divisions, and making negative gearing more attractive.
