NAB says housing market expectations too pessimistic

The Australian housing market continues to soften, but according to the National Australia Bank the current price fall expectations are overly pessimistic.

“Our modelling of house prices suggests that while further moderate declines are likely in 2011 some moderate increase should occur in 2012,” the NAB says.

“Expectations of further falls in house prices out to 2013 clearly are not helping consumer sentiment or business confidence to invest,” NAB group chief economist Alan Oster says.

The report notes a structural shortage of dwellings remains nationally, although the recent decline in rates of overseas migration could be expected to prevent the situation worsening significantly.

“Nevertheless, this is likely to maintain a floor under dwelling prices in the longer term,” it says.

The report noted its most recent NAB residential property survey, which indicated that respondents thought house prices would fall by 1.4% over the next year.

The house price falls were expected to be across all states, with the exception of WA (up 0.2%).

The largest house price declines are envisaged in Queensland (down 2.3%) and Victoria (down 2.1%).

Noting the RBA bias towards policy tightening, the NAB sees December as remaining the most likely option for a rate rise, as stronger GDP growth should be more established by then.

“We have pencilled in a further [final] rise in May 2012, bringing our end point target cash rate to 5.25%,” Oster says.

“That would be consistent with ongoing strength in the economy in a period of relatively high inflation.”

But the bank notes the next move in the cash rate would only take place when growth momentum and labour market tightness were more apparent.

It notes that growth in the domestic economy weakened in July with business conditions now indicative of below-trend growth.

“The synchronised slowdown in global growth has worsened and we have revised our growth forecasts down by ¼pt in 2011 (to 4%) and ½pt in 2012 (to 3.8%),” NAB says.

Australian forecasts have been revised down a touch (especially in the near term) given heightened global uncertainty and signs that local momentum continues to slow, together with continued delays in the recovery of Australia’s coal exports.

Near-term softness also has base impacts on 2012 forecasts.

But Australia’s high terms of trade, resumption of full coal production (by late 2011), strong mining investment and Queensland rebuilding are expected to boost GDP growth, NAB says.

“NAB forecasts are significantly weaker than RBA’s view – we see year-ended growth of 2.6% this year (RBA 3¼%) and around 3¼-3% in the out years (RBA 3¾%).

“Calendar year forecasts were revised down ¼% (to 1.5% in 2011 and 4.2% in 2012 respectively).

“Core inflation (e.g. carbon pricing) is expected to still to move up to around (or above) 3%.

“The domestic economy continues to suffer under the weight of the high AUD, the enduring impacts of the floods earlier in the year, and the persistence of cautious consumer behaviour.

“While the mining industry continues to perform strongly, trade-exposed sectors outside of mining and those industries dependant on consumer demand are still struggling with very poor conditions.

“This weakening trend was broad based – with the falls most pronounced in finance and business services reflecting recent global uncertainty and volatility associated with US and European debt issues, manufacturing and the service sectors,” the bank says.

“While we expect to see a boost to GDP growth in the June quarter, as the economy recovers from the flood-induced downturn in the March quarter, some weakness appears to have persisted into the second half of this year.

“The modest fall in retail trade data in May was compounded by another disappointing outcome in June, with trends in retail trade easing to a more subdued pace.

“Employment growth has also disappointed over the first half of this year.

“Household saving rates are high and asset prices have been falling over recent months, suggesting that the softness in consumer spending behaviour will persist into the future.

“Credit growth declined in June and has been fairly subdued over recent months relative to historical standards; business credit fell modestly, while housing credit slowed to its most subdued monthly pace in almost 27 years,” it notes.