NAB expects a more muted property market in 2018, with RBA likely to hike rates
An improvement in market sentiment across most states in the third quarter of 2017 suggests there may still be some legs left in the housing market, with Melbourne showing promising growth while Sydney slowing from the 20 percent rises, according to NAB's latest survey.
Market conditions continue to vary considerably across locations, with each city seemingly at very different stages of their housing cycles, says NAB Residential Property Survey.
Annual property price growth across eight capital cities has moderated only marginally to 8.5% y/y in September, down from this year’s high of 11.4% in May.
“Sydney, Melbourne and Hobart have each continued to see double digit yearly rates of growth, although the momentum is clearly with Melbourne and Hobart, as Sydney is seeing a much more pronounced slowing in recent months - a trend that is reflected in other measure of the market pulse, including auction volumes, clearance rates, and market sentiment,” it says.
Perth housing prices remain lower from the same time last year, although the decline has slowed since mid-2016, consistent with expectations that the worst of the economy’s post mining boom woes may be over.
“But despite prices remaining a little more resilient than expected this quarter (outside Sydney), we have maintained our view for more muted market performance going forward, particularly following our revised expectations for RBA rate hikes which have been brought forward to mid-2018 (from H2 2019),” said NAB.
Hobart has outperformed others in annual growth, with prices rising more than 14% over the year to September.
In the bigger east coast markets, Melbourne has seen the strongest growth, rising around 12% over the year. Sydney is close behind, at 11% growth, but well below the nearly 20% growth earlier this year.
For the other capital cities, the Brisbane and Adelaide markets are seeing more modest gains, which are more in keeping with subdued increases in household income, while Darwin is the only other major city besides Perth to see declines over the past year, NAB said.
Detached house prices have generally performed better across most markets. In many cases that simply reflects the land component of the property price, however, the apartment segment in some markets have also come under pressure from supply-side concerns, such as Brisbane, where reports of settlement issues have become common.
Melbourne has often been cited as a market with apartment oversupply risk as well, however, solid population growth and an overall buoyant housing market has helped to underpin near double digit growth in unit prices - similar observations can also be made for Sydney, said NAB.
“We have long anticipated a definitive shift to more moderate market conditions, brought about by a combination of factors (which vary across markets) including deteriorating affordability, rising supply (primarily apartments) and tighter credit conditions following the macro prudential response to financial stability concerns (mainly targeted at investors).
“While we are yet to see clear evidence of that, we continue to hold this view - although recent price trends suggest the timing of the shift may vary somewhat across markets. Additionally, we anticipate an even higher degree of uncertainty around the price outlook than usual given the relatively unchartered waters of macro prudential intervention,” the note said.
It added that regulatory intervention are often thought to have their greatest (dampening) impact on the market early on, before losing their potency over time - making the seemingly divergent trends between the Sydney and Melbourne markets at present all the more perplexing.
“This could suggest some upside risk to our outlook should prudential policy lose potency, helping Sydney regain some of its previous price momentum. Foreign demand is another consideration that is difficult to ascertain.”
The survey noted the impact of policy to curb foreign capital entering the Australian property market.
It said that there were a number of positive elements that should support the market enough to prevent a severe adjustment in prices (assuming important factors such as the economic outlook play out largely as expected).
Mortgage rates remain near record lows (despite a tightening in credit conditions earlier this year), and some lenders appear to be taking their foot off the brake again more recently - according to RBA data the discounted variable mortgage rate has returned to its previous low.
That is helping to keep mortgage interest payments well down on previous peaks (as a share of disposable income), despite disappointing growth in incomes.
Meanwhile, the housing supply-demand balance remains quite favourable, with most cities (excluding Perth and Darwin) seeing rental vacancy rates in undersupplied territory (below 3%), consistent with NAB estimates that show a high degree of pent-up demand for housing in many states (especially NSW and Victoria) - population growth in Victoria has been particularly strong, and is expected to remain elevated.