The Australian housing market is expected to close the year strongly with potential annual price growth of 22.7%, according to the recent NAB Quarterly Australian Residential Property.

NAB Group chief economist Alan Oster said the recent lockdowns in New South Wales and Victoria had no material impact on the housing market, which remained resilient despite the sharp decline in population over the past year.

“The market was well supported by lower rates, the federal government’s HomeBuilder program and a series of state government incentives,” Oster said.

“Contributing to the strength of housing is also the better-than-expected performance of the labor market, despite significant disruptions to the economy.”

However, Mr Oster noted that the rate at which house prices are rising has already slowed down recently.

In fact, a recent CoreLogic report showed a monthly increase of 1.5% in house prices in September, weakening from the peak of 2.8% reached in March.

On an annual basis, prices have increased by 20.3%, the highest annual growth rate since June 1989.

Mr Oster said market stability in recent months points to a rosy outlook for prices, which are expected to end the year with an annual gain of 22.7%, before slowing to 4% in 2022.

“The results in the year saw Sydney and Hobart prices end the year up about 28%, while Brisbane and Adelaide are expected to realize gains in the 20% range,” he said.

“Melbourne is expected to post a slightly softer annual profit, while Perth is likely to see the slowest but still strong growth at close to 15%.

Strong economic indicators

The strong annual gains at the end of the year will reflect a robust outlook for the economy.

Mr Oster said the economy will recover in the final quarter of the year, given busier activity and higher household consumption following the easing of lockdowns and restrictions.

“The continued strength in both business and residential investment will also help,” he said.

The labor market also appears to be recovering. While the year-end unemployment rate is uncertain given the timing of the indicators, Mr Oster said it is expected to be 4.4% by the end of 2022 and close to 4% by 2023.

“As a result, wage growth will gradually pick up and then flow into consumer price inflation,” he said.

“However, the delays are likely to be long and therefore we will not see inflation back within the Reserve Bank of Australia target until the second half of 2023.”

Given these factors, Mr. Oster said a cash interest rate hike through early 2024 is unlikely.

Still, he said it is crucial to monitor developments on the macroprudential front.

Recently, the Australian Prudential Regulation Authority (APRA) increased the service rate for lenders, reducing the debt capacity of borrowers by about 5%.

“While this won’t have a major impact on lending or the real estate market, macroprudential policy is rarely used in isolation,” Oster said.

“We remain alert to the possibility of further measures around the turn of the year, probably in the form of high limits on debt-to-income or loan-to-value ratios.”

Photo by Craig Davies on Unsplash.

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