NAB: Get ready for a slowdown in Australian house price growth

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Housing affordability, and the outlook for house prices, has become a hot topic of debate across financial and political circles in Australia in recent months.

Nowhere are those concerns more acute than in Sydney and Melbourne.

Huge price increases over the past year, coming on top of substantial gains in the period beforehand, has all but ensured the debate over housing affordability has gone up an octave or two, creating a subset of debates as to what’s been driving the gains, whether financial stability risks have increased and ways to solve what many now deem to be a crisis.

While policymakers continue to grapple with potential solutions to those perceived problems, what everyone wants to know — be they homeowners or those who are looking to enter the market — is what are house prices likely to do from here.

Will they keep ratcheting higher in Australia’s southeastern capitals, outpacing those in other parts or the country, or will they come back to the back? Or will they actually decline?

That’s what the average Australian really wants to know, albeit for differing factors.

There’s no shortage of views being offered on their outlook for house prices.

Only yesterday, Moody’s, in conjunction with CoreLogic, had its say, forecasting that price growth in Sydney and Melbourne will slow sharply in the years ahead.

It sees both house and apartment prices in Sydney falling over the next few years, while apartment prices in Melbourne are also tipped to decline. House prices in Melbourne are still expected to increase, although at a pace significantly slower than that seen in recent years.

While it shares a similar view to that offered by Moody’s, economists at the National Australia Bank, perhaps wary of forecasting declines only to see prices scoot higher, don’t expect that house prices across the nation’s capitals will actually decline this year or next, although it believes that the pace of growth will slow noticeably from the levels seen in 2016.

Here are the bank’s forecasts for capital city house prices for 2017 and 2018.

Source: NAB

After a strong start to the year, logging gains of around 5% according to latest data released by CoreLogic, the NAB expects house prices in Sydney and Melbourne will continue to lead the pack this year, forecasting gains of 10.5% and 10.8% respectively.

It also expects prices in all other capitals to increase with the exception of Perth where it sees prices falling 3.4%.

“By capital city, house price growth is forecast to remain strongest along the eastern seaboard in 2017, consistent with outcomes in the NAB Residential Property Survey and a relatively solid outlook for their local economies,” it says.

“Sydney and Melbourne will both see solid, albeit slightly slower, growth in prices. Brisbane, Adelaide and Hobart will cool also, while Perth will remain very weak as house prices decline by another 3.4% — although the pace of decline is expected to ease.”

Across the capitals, the bank sees house prices rising 7.2%, thanks largely to expected strength in Sydney and Melbourne.

Looking further ahead into 2018, it expects price growth across the capitals to moderate to 4.3%.

“These trends will broadly continue into 2018, with growth in Sydney and Melbourne returning to more sustainable levels,” it says.

For capital city apartment prices, like those for houses, the NAB expects they too will increase this year before falling modestly in 2018 as additional stock resulting from Australia’s high-rise construction boom is completed.

Here’s what the NAB is forecasting over the next two years.

Source: NAB

“Apartment prices are expected to continue their trend of underperformance relative to detached houses, reflecting the heightened supply concerns in the market,” it says.

In terms of specific markets, the NAB expects apartment prices in Sydney to rise strongly again this year, forecasting that they will increase by a further 9.7%.

Of the other major markets, prices in Melbourne are tipped to rise 0.5% while those in Brisbane — the market where oversupply concerns are the most acute — are forecast to fall 0.3%.

Looking ahead to 2018, apartment prices in Melbourne and Brisbane are both expected to decline, while those in other capitals — including Sydney — are tipped to remain largely static.

From a holistic perspective, the NAB thinks that recent housing market strength will continue over the next few months, led yet again by Sydney and Melbourne.

However, given recent policy developments, and increased affordability constraints, it thinks that will likely signal the end of rampant price growth.

“Given the current policy position, NAB expects that property prices will maintain good momentum over coming months, especially in Sydney and Melbourne, before tighter credit and prudential conditions begin to have a more noticeable effect, compounded by large additions to the apartment stock and limitations from subdued wages growth/deteriorating affordability,” it says.

“In terms of the fundamentals looking forward, wages growth is expected to remain constrained, meaning that affordability is becoming more of an issue as prices rise and banks continue to raise mortgage lending rates.

“This fact, along with prudential tightening and solid supply additions in apartment markets could limit the potential for future price gains.”

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