National Australia Bank has boosted its expectations for house price growth this year to 3.4 per cent and also expects apartment values to fall less than previously expected, saying further rate cuts will continue to stimulate the market.
NAB, the country's fourth-largest mortgage lender, raised its prediction for standalone homes from 0.4 per cent and narrowed the loss it expects on apartment prices to 0.8 per cent from 1.6 per cent, citing improved sentiment from real estate professionals in its latest NAB Residential Property Index and expecting a continuation of last year's rate cut-driven demand.
The bank expects the Reserve Bank of Australia to cut the benchmark cash rate from the current record-low 1.5 per cent to 1 per cent by year-end in response to weaker inflation and as housing construction, which buoyed the economy last year, slows.
"Most market commentators have been surprised by the strength in the Melbourne and Sydney property markets in the second half of 2016," said Riki Polygenis, NAB's head of Australian economics. "Because momentum is so strong, that's coming through in the survey in terms of the broad index that measures sentiment within the survey. We're still expecting a moderation in house prices going into 2017 but it is a modest revision upward from where we were".
NAB dismissed the idea of sharp or sudden falls in prices, saying these would only happen if unemployment or interest rates surged, which it said was unlikely. However, even the revised figures represent a cooling from last year's capital city average of 11.6 per cent growth for houses and 5.9 per cent growth in apartment prices.
"Sydney and Melbourne will both see solid, albeit much slower, growth in prices, while Brisbane and Adelaide are forecast to cool a little," the report said. "Perth will remain very weak as house prices decline by another 2.7 per cent this year, as the market continues to feel headwinds from the mining sector, slower population growth and ample housing supply."
Sydney, Adelaide and Hobart would be the best performers for units, the report said. Unit prices would fall 2.7 per cent in Melbourne and 1.8 per cent in Brisbane as a result of oversupply of new apartment product in the market, but the worst performance would still be in Perth, where apartment prices would likely fall 3.8 per cent, it said.
"Prices are generally expected to be fairly weak for apartments across the country in 2017," it said. "The record pipeline of apartment construction in Sydney naturally presents a significant downside risk to the forecast, but substantial pent-up demand for housing should support the market, while the relative affordability of apartments (in the country's most expensive market) could also trigger a shift in demand by some buyers."
The revised forecasts were part of the bank's latest quarterly survey of 250 property industry professionals. While the overall survey of sentiment left the headline Residential Property Index unchanged at a reading of 15 from the September quarter, underlying that was a weakening of sentiment in NSW, Queensland and WA, and a strengthening of sentiment in Victoria and (to a lesser extent) SA and NT.
Housing affordability remained the largest constraint on new housing development in Victoria, Queensland and SA/NT. In NSW, affordability and tight credit were seen as the biggest hurdles. In WA, the ability of price gains to be sustained was regarded as the biggest constraint.
Separate figures from data provider Domain on Tuesday showed affordability worsened for buyers in Sydney, where the median house price topped $1.1 million.
The fourth quarter also marked the first increase in foreign buyers' share of the residential market in a year.
In the three months to December, foreign buyers accounted for 10.9 per cent of all new property purchases, up from 10.2 per cent in September and the highest level since the three months to March. In established housing markets, their share rose to 7.6 per cent from 6.4 per cent in the September quarter and the highest level since the last quarter of calendar 2015, NAB said.
While the apparent boost in demand from foreign buyers, particularly Chinese ones, reflected the improved sentiment in the local residential market, the true extent of foreign demand was hard to measure, Ms Polygenis said.
"It's very difficult to square up with reports that Chinese authorities are cracking down on capital outflows by households out of China," she said. "It's very difficult to know how exactly the figures from this survey translate through to actual demand on the ground. The official data we get from [the official Foreign Investment Review Board] is very delayed."
