"A number of factors mentioned below are expected to offset the drop in prices in some capital cities." - Matt Lapish, Senior Investment Analyst
NAB has heavily revised its house price forecast upwards, with the major lender now tipping an annual fall of 4% in 2023 after the market began to show faster-than-expected signs of recovery.
NAB had previously expected prices to come off by 11% this year and for a peak-to-trough fall of 18%. However, CoreLogic data showing gains Sydney, Melbourne and Perth drove a 0.8% capital city increase in March, as the market began to emerged from the post-COVID boom downturn.
Since peaking in early-2022, the overall dwelling price index is still 9.4% lower, led by large falls in Sydney, Brisbane, Melbourne and Hobart, where prices have fallen by around 10% or more from their respective peaks. Prices in Perth and Adelaide have held up.
“The price adjustment has largely been driven by a very large fall in borrowing power as rates have risen sharply. Increasingly, it appears the very rapid pickup in housing demand is offsetting this drag on prices with population growth rebounding more strongly than expected since borders reopened in early 2022,” NAB’s chief economist Alan Oster said.
“This is particularly evident in the rental market where vacancies have fallen to very low levels across the capitals, and rents are growing strongly in most areas. Prices also appear to be turning, with the pace of decline having moderated significantly in late 2022 and early signs of an inflection point in early 2023.
“As such, we have revised up our expectations for house prices and no longer expect a peak-to-trough fall of 18%. We now see some further small falls in coming months – totalling around 3.5% – before prices level off for a period and then begin rising in 2024.”
“Volumes and new listings are at low levels and the full impact of higher rates is yet to flow through which could well mean we see some further adjustment.”
NAB is expecting the Reserve Bank of Australia to keep interest rates on hold at 3.6% until the first half of 2024, where its sees rates easing back to around neutral at 3.1%.
A growing number of analysts have called the bottom of the market downturn. Using CoreLogic data, it would mean a 9.4% peak-to-trough fall – the biggest downturn on record – although still falling short of some economists’ forecasts of a 15% fall. Sydney prices would have dropped 14% and Melbourne prices by 9.8%.
Some analysts, such as AMP chief economist Shane Oliver, have maintained expectations of a 15% to 20% peak-to-trough, citing demand from bargain hunters running its course, the impact of higher interest rates reasserting itself and listings increasing in response to distressed selling.
Oster said strong population growth, a tight rental market and healthy labour market will be key offsets to prices coming down.
“The demand and supply balance favours upward pressure on prices” in the longer run, he said.
Rental growth propping up sentiment
Rental growth is propping up residential property market sentiment in NAB’s quarterly Residential Property Index, which was well down year-on-year in the March quarter as prices cooled and interest rates continued their rise.
The Index was slightly higher over the quarter to 9 points (a score of 0 is neutral), but is still below the survey average of 17. A year ago, it was sitting at 58.
Housing market sentiment is currently highest in the Northern Territory (67 pts), Western Australia (51) and South Australia (41). Sentiment turned positive in Victoria (5) after falls in the previous two quarters. Queensland was steady (at 6) while NSW turned a little more negative (-7).
Confidence levels improved slightly during the March quarter, but continue to point to a relatively slow housing market recovery over the next few years. The one-year confidence measure lifted modestly to a well-below average 15, with the two-year measure also still printing at a well-below average 33.
Rising rates a bigger concern
Rising rates are becoming a bigger constraint for buyers of existing housing, according to NAB’s survey, and are now considered a “very” significant constraint. Rising rates are also viewed as the biggest constraint for home buyers in all states, led by NSW and Victoria. The exception is WA, where a lack of stock is having the biggest impact. Access to credit is the next biggest hurdle, and also deemed “significant” in all states (aside from WA).
Helia’s Home Ownership Pulse survey, also released yesterday, showed that nine in 10 prospective first home buyers are now reporting it is increasingly difficult to save for a deposit.
First home buyers pulled back in new property markets, NAB’s survey showed, with their share of total sales dipping to a near six-year low of 35.7%. This was attributed to a sharp fall in the market share of first home buyer owner occupiers to a five-and-a-half-year low 23.7%.
The overall market share of foreign buyers in new property markets rose to 7.9%, underpinned by NSW’s steep increase to 16.2% – the state’s highest read since the first quarter of March. The share of foreign buyers in Victoria, however, fell to a two-year low of 4.0%.
Nearly two-thirds will refinance
Helia’s survey also found that 41% of buyers have opted for a home loan with a fixed rate period, with the remainder on variable loans. Many fixed rate borrowers have been insulated from the Reserve Bank of Australia’s run of 10 interest rate increases over the past year, but 53% will have their fixed rate period expire in the next 12 months, with 27% in less than six months.
For people with fixed rate home loans expiring in the next 12 months, 64% said they are likely to refinance.
A third of recent home buyers are finding it difficult to meet their current mortgage repayments, and 53% said they would have difficulty ahead, should interest rates increase by another 1%.
Source: Australian Property Journal