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Australian property prices falling but decline varies from state to state

The National Australia Banks Residential Property Index fell to -14 points in September, down considerably from -5 points in June. However, the index conceals considerable variation among the states, with conditions identified as being much weaker in Queensland, Victoria and South Australian.
New South Wales and Western Australia bucked the national trend and managed to produce small index gains.

But forward expectations have also weakened relative to the last survey with the national index expected to be softer on the back of weaker house price expectations in Victoria and a more subdued outlook for rents in all states, bar NSW.

Prices fell 2.4% in September with Victoria recording the biggest fall at 3.8%). National house prices are expected to fall by 1% over the next 12 months.

Modest house price growth is expected to resume in NSW, SA and WA but the national average will be dragged down by a significant downward revision in house price expectations in Victoria (-3.2%) and continued weakness in Queensland (-1.7%).
National house prices are expected to recover by September 2013, with modest growth of 0.5%. WA is expected to significantly out perform with growth of 3.4%, while Victoria is the only state expected to record negative price growth at -2.1%.

Gross rental yields increased in the September quarter as the contraction in house prices was offset by positive rental growth. Nationwide house rents increased by 0.7% in September compared with 1.3% in June, with rental growth slowing in all states bar NSW.

Forward rental expectations also weakened, with the latest survey pointing to rental growth of just 2.5% over the next year despite an upward revision for rental expectations in NSW to 4.8%. Over the next two years, nationwide rents are expected to increase by 4% led by NSW (6%) and WA (5.3%).

The report also shows that owner occupiers are playing a bigger role in underpinning demand for housing particularly in new property markets as investors begin to shy away in a more difficult economic climate.
Demand for housing remains strongest in inner city locations, with capital growth prospects strongest in sub-$500,000 markets. House buyers are now citing tight credit conditions, construction costs and employment security as the biggest impediments to purchasing property.  Concerns over interest rates are also still significant, but have fallen.

‘Our survey also shows that only 20% of respondents now expect interest rates to be higher over the next 12 months, compared with 71% in our June survey. NSW was the most pessimistic state with regard to interest rates, possibly reflecting the fact that the average home loan size in NSW is also the largest among the states,’ said Alan Oster, Group chief economist.

Oster pointed out that demand for existing housing weakened nationwide in the September quarter. ‘Inner city houses remain the only property type where demand is considered to be good, but only marginally. The most notable deterioration in demand was identified in middle/outer ring high rise properties,’ he explained.

Oster said he thought Australians were overly pessimistic about the housing market. ‘A structural shortage of housing remains nationally, commencements are down, interest rates are expected to stay on hold for some time and the unemployment rate is low, contributing to high job security. These factors are expected to maintain a floor under house price growth, which we see resuming at below 4% in 2012 after drifting down in 2011,’ he added.