One of Australia’s largest banks has identified so-called “megatrends” shaping Australia’s property markets.
National Australia Bank (NAB) says that the ongoing housing shortage, combined with above-average population growth (primarily from net overseas migration) and smaller household sizes, is leading to strong value and rental growth for residential property.
NAB’s “Market Megatrends 2024” report identifies the recent increase in the value of lending to property investors, who it says are primarily focused on capital growth, not rental returns.
The report also warns of a major demographic shock over the next 20 years, with huge amounts of wealth being transferred between generations as Australia’s population ages and wealth levels increase, mainly from residential property price appreciation.
The big picture
NAB points to how home ownership levels have fallen in Australia, from 70.7% in 1999-2000 to reach 66.3% in 2019-2020.
“A key hurdle for increased levels of home ownership remains an insufficient supply of new housing across Australia,” says CoreLogic’s Research Director, Tim Lawless, who contributed to the NAB “Megatrends” report.
While building approvals have recently started picking up, “approvals are still low (particularly for ‘other dwellings’ such as apartments), both by historical standards and relative to population growth.”
CoreLogic and NAB point out that 45,000 new homes were completed in the second quarter of 2024, whilst the population grew by 164,000 just in the first three months of the year.
This ongoing shortage of homes has led the NAB to forecast that capital city home prices will rise by 5% over 2025.
The bank says it expects the Reserve Bank of Australia will begin cutting official interest rates from their current 13-year high of 4.35% in May 2025 with a 0.25% cut, “followed by a gradual continued easing towards 3% by mid-2026.
“NAB’s view is that Reserve Bank of Australia cuts will be later and shallower than many central bank peers,” says Gareth Spence, the bank’s Head of Australian Economics.
Lower-priced housing
The “Market Megatrends 2024” report is primarily aimed at finance brokers, and NAB and CoreLogic suggest brokers advise potential first home-owner clients to “consider lower priced housing options”.
“The lower quartile of housing markets will provide a more affordable entry point,” CoreLogic’s Tim Lawless says.
“Most capitals see more than a $100,000 difference between the 25th percentile and median value, with more expensive cities like Sydney recording a difference of almost $400,000 for houses and $200,000 for units.”
However, Mr Lawless says, in the current climate of high interest rates and reduced credit availability, “competition is also generally stronger in this segment of the market”, with CoreLogic’s Home Value Index showing that the bottom 25% of home values across the capital cities rose 2.4% in the September quarter, compared to only a 0.2% lift in the top value quartile.
Mortgage broker Nathan Smith, who contributed to the “Megatrends” report, suggests brokers “coach customers to think outside the box (and their dream location)”.
“It’s not always about finding the dream home right away,” Mr Smith says.
“Sometimes, it’s about helping buyers make compromises – whether it’s considering smaller properties, further locations, or even different loan structures.”
Rentvesting
Another strategy CoreLogic and NAB suggest is that brokers could advise clients to “build wealth by rentvesting”.
They note ABS figures which show that in the 12 months to August 2024, 8,524 first-home buyers took out finance to purchase as an investor, rather than as owner-occupiers.
“Purchasing an investment property may provide first home buyers with an opportunity to build equity if housing values rise, and also provides more flexibility in the location of the property, pricing and type of dwelling.”
Investors active and eyeing opportunities
The “Megatrends” report finds investor activity has been on the rise across Australia’s housing markets and is now well above long-term averages.
The value of lending to investors increased by 34.2% over the past year, compared with just a 16.8% increase for owner-occupier lending.
In a finding that might surprise some, CoreLogic’s Tim Lawless says that “capital gain is often the primary objective for Australian investors with rental yields a minor consideration.”
Generally, units provide a stronger gross rental return and gross yield than houses.
CoreLogic calculates that the median gross dwelling yield across Australia’s capital cities ranged from 3% in Sydney (forced down by high property values in relation to rents) to 4.3% in Hobart, which Tim Lawless notes is well below retail mortgage rates for investors.
There are a small number of suburbs that achieved both high capital growth and high rental yields, but these tend to be located in regional areas.
With interest rates remaining at 13-year highs, Sydney-based finance broker Elouise Dooley told the “Megatrends” report that she’s telling clients that if they “can get into the (property) market now, we are absolutely urging them to do so.
“When interest rates do drop, it’s going to open the market to a lot more buyers and become increasingly competitive,” she says.
Get set for the great wealth transfer
The “Megatrends” report also details how, over the next 20 years, huge amounts of wealth will transfer between generations, as Australia’s population ages and wealth levels increase.
NAB says ABS figures show Australian household wealth was almost $16.5 trillion in June 2024, up from just under $10.5 trillion only five years ago.
Land and homes accounted for $11.2 trillion of that total household wealth in the latest figures, compared with just $6.7 trillion in June 2019.
Wealth management firm JBWere estimates that $5.4 trillion will pass from older generations in Australia to younger people between now and 2044.
While this total is a huge sum of money, NAB says that, at an individual level, the value of inheritances and gifts transferred varies widely, with Productivity Commission research finding that the average inheritance in the 2018-19 financial year was $125,000.
However, the median inheritance was much lower, at $45,000.
Nevertheless, with an estimated $100 billion worth of existing homes (calculated in 2019 dollars) set to be bequeathed in just the year 2035 alone, NAB says this presents a significant opportunity for brokers “to guide families through the financing options that could facilitate the transfer of these properties as the estate is distributed.
“On the home lending front, this might include explaining the different property investment options, or ways to reduce or restructure their existing home lending arrangements.
“In other instances, recipients of inheritances might seek support from brokers on ways to assist younger generations getting into the housing market – potentially enabling wealth to be transferred during the parents’ lifetimes,” the report says.
With capital growth of residential property making up an increasing percentage of household wealth in Australia, the findings of the “Megatrends” report raise some serious questions of equity and future access to housing and wealth creation for those who currently do not have a foothold on the property ladder.