House prices climb by 23pc, has likely peaked

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HOUSE prices will have surged by 23% over this year according to NAB, and while the major lender has revised upwards its expectations for house growth in 2022, a dip in property market sentiment suggests the market has passed its peak.

The major lender’s latest quarterly Residential Property Index fell to 60 points in the September quarter from a survey high of 71 in the June period, where 0 points is considered neutral.

It comes as house prices growth slows – albeit annual rates are at long-term highs – sales are easing, and building approvals fall. Sentiment softened in most parts of the country, while confidence fell again, but remained above average.

“We have slightly revised up our forecast for dwelling prices in 2021 based on stronger than expected outcomes in recent months as well as small upgrade to our expectations for Q4 and early-2022,” NAB group chief economist Alan Oster said.

“Overall, that sees a very strong print for house prices in 2021 but a sharp slowing in 2022 as the impact of lower interest rates fades and affordability constraints begin to bind.”

National house price growth will fall to 4.9% across the capital cities. Sydney will lead growth with 5.4%, followed by Melbourne and Brisbane at 4.9%, Hobart at 4.3%, and Adelaide and Perth with 3.9%.

Over 2021, house prices in Sydney and Hobart will have jumped by about 28%, with Brisbane and Adelaide in to 20%-plus range and Melbourne just behind. Perth would see the slowest growth, but still at a 15% year on year.

“Overall, the property market held up remarkably well despite the disruptions to the economy with strong support provided by policy makers and little labour market fallout through the pandemic,” Oster said.

He said the market has been well supported by lower interest rates, the federal government’s HomeBuilder program, as well as a range of state government incentives, and the better-than-expected performance of the labour market despite the pandemic.

NAB expects the economy to rebound “relatively briskly” as restrictions are eased in early to mid-December quarter and for pre-lockdown GDP to be reached by the end of the first half of 2022.

“That said, house price growth has slowed recently (though it remains strong), activity has slowed (with time on market increasing and new listings normalising) and approvals for both construction and lending finance pulling back. Auction clearance rates have seen more mixed results, falling notably in Melbourne on the current lockdown but having since recovered – with all markets now at high levels. Rents have also begun to recover.”

Survey expectations are for house prices in the next 12 months to outpace rents, meaning gross yields should fall before leveling out in two years’ time as prices and rents rise at a similar pace, although some locations – namely Western Australia, the Northern Territory and ACT – may see yields rise.

Oster noted the Australian Prudential Regulation Authority’s widening of the interest rate serviceability buffer by 0.5 percentage points, and said the “assessment for now is that this will not see a large impact on lending or the property market.

“However, macro-prudential policies are rarely used in isolation and we remain alert to the possibility of further measures around the turn fo the year, likely in the form of high DTI or LVR speed limits.”

Strong building demand and shortages of materials are causing building costs to rise strongly, and construction costs have now surpassed a lack of development sites as the biggest impediment for new housing development.

Property professionals identified a lack of stock as the biggest constraint facing buyers in the established housing market.

Foreign buyers are widely expected to increase their market share – especially in new residential markets – over the next 12 months as international borders reopen.

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