House prices to rise 3.6% over next two years as sentiment rebounds broadly: NAB index

House prices are forecast to rise by 3.6% over the next two years to March 2015 led by WA and a rebounding Victoria, according to the latest NAB quarterly residential property survey.

Capital growth expectations in the next year are strongest in the sub-$500,000 price range, but improvements are forecast across all price levels, says Alan Oster, chief economist at NAB, who compiled the report alongside senior economist Robert De Iure and head analyst Dean Pearson.

Sentiment about the property market improved strongly over the March quarter with the index rising sharply to 35 points from in 8 points in the December 2012 quarter.

WA was the stand-out in terms of sentiment with its index rising from +41 points to +71 points, but there was also a strong turnaround in Victoria, with its index from -15 to +34.

Sentiment was also stronger in NSW (rising from +13 to +38 points) and South Australia/NT (-20 to +28 points).

Queensland was the only state not to register an improvement in sentiment, with its index falling slightly from +15 to +14, replacing SA/NT as weakest state.

The results of the index are based on a survey of around 300 property professionals, principally estate agents, property owners and investors.

House prices recovered in the first quarter of the year to be up 0.4%, following a fall of 0.6% over the December 2012 quarter, according to NAB modelling.

NAB expects house price growth to accelerate and rise 2.2% in the next year and be up 3.6% by the end of the March quarter of 2015.

However, state outlooks differ strongly with optimism highest in WA, where a 3.8% gain in house prices is forecast over the next 12 months followed by Victoria (2.4%) and NSW (2.2%).

Expectations are weakest in Queensland (1.3%).

Over the next two years, WA will remain the strongest performer (5.4%) with Victoria (3.8%) the next best.

“House price falls in Melbourne were among the heaviest in this downturn, but Victorians are now the most optimistic (after WA) with regards house price growth in the next 2 years, which are tipped to grow 3.8% (1.9% forecast previously),” says Oster.

“In NSW, property professionals see prices rising 3.5% (1.8% previously).

“Expectations were also scaled up in SA/NT to 2.8% (1.5% in December 2012 quarter) and Queensland to 2.7% (2.2% in December 2012 quarter).”

NAB modelling indicates capital city house prices will grow 1.7% through the year to March 2014 and 2.4% in the year to March 2015.

As with the state outlook, the capital city outlook varies strongly.

Price growth is strongest in Perth - up 4.2% in the year to March 2014 and 3.7% to March 2015 - and weakest in Adelaide (0.0% and 1.2%) and Melbourne (1.1% and 1.6%) the weakest markets.

“Owner occupiers are the main players in new property market, but investors - Australian and foreign - are also growing,” says Oster.

Oster notes a marked improvement in demand apparent for all types of new property but that overall demand still “relatively weak”.

He says the inner city is the most preferred location for new buyers.

Participants in new property market are still citing tight credit and affordability as “significant” constraints on new development but less so than in the December 2012 quarter.

“Improved affordability drew more first-home buyers into the existing property market in the first quarter of 2013, especially in WA.

“Stronger demand for existing property was also noted in all locations and for all property types with demand strongest for inner city and middle/outer ring houses.

“Employment security remains the biggest impediment for buyers of existing property in all states except WA, where a lack of stock is the biggest concern,” he says.