Property price ‘floor’ expected by early 2023: NAB report

The report — released on Friday (21 October) — combined insights from NAB’s group chief economist Alan Oster, NAB’s head of behavioural and industry economics Dean Pearson, as well as analysis from CoreLogic and mortgage brokers.

The pace of change

Among the six “megatrends” identified in the report are “a soft landing” for the property market following the recent “pace of change”.

It suggests that while a number of risks could cloud the economic outlook (particularly international and geopolitical events), Australia’s property market will likely experience less volatility moving forward.

According to NAB’s chief economist Mr Oster, slowing global growth, high inflation, low unemployment and rising rates mean that while Australia’s economy is “delicately poised” heading into 2023, it is not likely to enter a recession. 

In the report, Mr Oster forecast that the official cash rate will likely reach “at least 3.10 per cent by the end of 2022 or early 2023”, with the Reserve Bank of Australia expected to proceed “much more cautiously as it assesses the impacts on households and businesses, and the shifting global economic environment”.

Noting this, CoreLogic’s head of research for Australia Eliza Owen said that Australia could “look forward to … a bit more of a normalisation in the change in housing values and the pace of sales volumes”.

Ms Owen explained that the last two years had resulted in extremes in economic activity (including a recession in 2020, which was quickly followed by the strongest year-on-year growth in GDP for a decade), where property prices had risen by 28.6 per cent.

However, the economic environment has been quickly changing, with the central bank having begun hiking rates “at [their] fastest pace since the early 1990s”, which has resulted in Australia experiencing its “fastest housing market downturn on record”, Ms Owen said at the launch event for the report on Friday (21 October).

She cited CoreLogic’s national Home Value Index data that showed that home values had declined 4.8 per cent in the five months to September 2022, with the decline becoming more geographically widespread each month.

Indeed, NAB’s economics team forecast that combined capital city home values could drop by around 20 per cent from their peak in April 2022 — taking house prices back to September 2020 levels by April 2023.

A soft landing

However, Ms Owen has flagged that the pace of national home value falls slowed in September, which was “quite unusual given the pace of increase that we’ve seen in the cash rate”.

“There is the potential risk or headwind of a lag between an increase in the cash rate and that actually flowing through to mortgage holders, but then you’ve got these big tailwinds there as well, which I think will at least insulate the decline from maybe where we thought that may have sat earlier in the rate hiking cycle,” Ms Owen said.

“The tailwinds of returning migration, high rents and strong mortgage serviceability capabilities should help to steady home values once the cash rate has peaked,” flagging that a lack of new listings would also insulate further price falls.

“I think that, ultimately, this is going to be a much shorter downturn than what we’ve seen previously,” noting that the last major downturn (in 2017) lasted for nearly two years.  

“There are signals that we could already be getting a stabilising of the cash rate by early next year. And obviously that is going to be the time where this market, this downturn, finds its floor. So, in that sense, it’ll probably be shorter than a lot of those historic declines.

“I think something that we might be able to look forward to coming out of these lockdown conditions and emergency rate settings is a bit more of a normalisation in the change in housing values and the pace of sales volumes as well.”

How would the major capitals fare?

In the report, CoreLogic has outlined how median values could change over different scenarios — revealing that Sydney and Melbourne would be hardest hit by double-digit drops.

In contrast, even a 20 per cent decline in home values across Adelaide and Brisbane — where prices have escalated sharply over the last two years — would only take home values back to price levels in mid-2021. 

The report read: “These decline scenarios have interesting implications for prospective sellers, buyers, and the stability of housing more broadly. Given that the average hold period in Australia is around nine years, many sellers stand to make a nominal profit on the sale of their home, even if property prices fall by 20 per cent. 

“For those in smaller cities like Brisbane and Adelaide, even recent home buyers may still achieve a profit if they need to sell. 

“The data reinforces that expected declines through the current downturn are unlikely to wipe out gains from the previous upswing in most markets. This has been a longstanding feature of the Australian property market, which has made it an attractive asset over time.”

Noting the findings, Phil Waugh, NAB executive – broker distribution, said: “Property market changes and the rising rate environment have had wide-ranging impacts for brokers and customers. 

“While there are still plenty of opportunities, everything hinges on how customers are thinking and feeling right now.

“Megatrends are powerful, transformative forces of change and are typically longer term in nature — making their impact all the more significant. While this report helps to identify the latest opportunities, cost-of-living pressures continue to surface. And while most customers are telling us they are coping okay, we know this isn’t the same for everyone. 

“Brokers are well positioned to provide much-needed guidance to help customers navigate the market.

“As the bank behind the broker, NAB is here to support customers and brokers every step of the way.” 

Other megatrends that the report identifies include:

• A refinance boom
• First home buyers being in a prime position
• A rise in investor activity
• A digital evolution