NAB revises up house price forecasts

National Australia Bank (NAB) has revised up its house price forecasts for this year and next, given unseasonably high demand and a lack of supply bolstering prices.

The major bank’s new outlook for property prices is that house prices will increase by 4.7 per cent this year and around 5 per cent next year, with the demand/supply imbalance offsetting the drag from reduced borrowing power and affordability as rates rise.

The forecast is based on the bank’s expectation that the central bank will lift the cash rate to a peak of 4.6 per cent by September and then keep it on hold until 2024, before cutting in 2025.

On Thursday (20 July), the major bank released its quarterly NAB Residential Property Index (for 2Q23), revealing that it had now changed its property price forecast for the coming years.

It flagged that Sydney house prices have risen by 6.3 per cent since February, with Hobart being the only capital city not to have experienced price gains in recent months.

While NAB said the resilience in house prices has been “somewhat surprising given the sheer impact of rising interest rates on borrowing power and affordability”, it flagged that prices are up 16 per cent from pre-COVID-19 levels and have tracked above 1 per cent month on month over the past two months.

A strong rise in housing demand appears to have been a key support with population growth rebounding very strongly since international borders reopened in early 2022, the major bank noted.

It has therefore upgraded its house price forecasts for the coming year. It had previously expected home prices to end the year around 4 per cent lower (taking peak-to-trough decline of around 12 per cent).

However, it has now revised up its expectation for dwelling prices, based on the “recent resilience and outlook for strong housing demand in the near term”, even while supply growth continues to be challenged by higher rates and supply-side pressures.

The bank economists wrote: “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 per cent higher based on price gains in the year to date.

“With the RBA beginning to normalise rates in 2024, we see some support for dwelling price growth – pencilling in a gain of around 5 per cent over the year.”

What did the survey find?

The NAB Residential Property Index 2Q23 surveyed 350 property professionals to ascertain property sentiment.

According to the survey, housing market sentiment has grown across the country and is well above the long-term survey average.

Indeed, the index rose to +33 points in Q2, up from +9 points in 1Q and up from +29 points at the same time last year.

The figure is above the long-term average of +17 points and reflects higher confidence levels in the property market and growing expectations of a recovery, underpinned by rising home prices and solid rental growth.

Forecasts for national house prices for the next two years were positive for the first time since 1Q22. Survey respondents now expect national home values to rise 0.6 per cent in the next 12 months (up from the -2.3 per cent forecast in Q1 survey), with longer-term expectations at 1.7 per cent (up from -0.3 per cent in Q1).

Western Australia has been touted as the state that will lead the way for improved house prices over the next 12 months (3.2 per cent), while Tasmania prices are expected to drop by 1.5 per cent, according to the survey respondents.

Rising rates and access to credit biggest constraints for purchasing existing stock

The Residential Property Index asked property professionals about their thoughts on what was holding back home buying.

Rising interest rates were again seen as the biggest constraint for buyers of existing property nationally in Q2. It was also the biggest impediment for buyers in all states bar Western Australia, where lack of stock was considered most problematic (and more so than any other state).

Access to credit was the next biggest hurdle and deemed “significant” in all states bar Western Australia.

A lack of stock and price levels also had a bigger influence on buyers in Q2, with house prices having a bigger influence on home buyers in NSW and Victoria.

However, when it came to new residential developments, construction costs were said to be the main barrier (80 per cent), while 66 per cent suggested rising interest rates were holding back new construction.

The next most common barriers for new residential developments were said to be delays in obtaining planning permits and labour availability (according to one in two property professionals).

Fast-tracking planning permission needed to improve supply

When asked what would be the most effective in reducing Australia’s housing shortage, 67 per cent of respondents said fast-tracking planning permissions and developments.

This was followed by financial incentives, such as low-interest rates and tax incentives (57 per cent) and then providing incentives for older Australians to downsize (51 per cent).

About one in two also flagged building more affordable or public housing, allowing more subdivisions, or making negative gearing more attractive as being most effective.