House prices heading towards a double dip as this year’s rebound shows signs of fading

Rising mortgage rates head the list of forces lining up to reverse the uptick in house prices that caught analysts by surprise earlier this year.

House prices defied the odds and rose again in the month of June – the fourth month of consecutive increases, but fears of a “downward adjustment” in the market are intensifying.

Rising mortgage rates and a potential lift in the volume of housing stock for sale threaten a reversal of this year’s surprise upturn.

CoreLogic’s latest figures show the overall pulse of the market is “decelerating” as June prices gained 1.1 per cent against 1.2 per cent for May. The slender improvement in overall prices – national prices are up 3.4 per cent since February – is clearly vulnerable.

The immediate risk is that the RBA may well pierce the reflating market if it pushes through a 13th rate increase when the board meets on Tuesday afternoon.

A cash rate hike this week is a little less than a 50-50 probability. But either way, the leading banks expect official cash rates to eventually hit 4.6 per cent, up from their current 4.1 per cent. In turn, that would suggest a peak mortgage rate of more than 7 per cent.

Key forecasters such as the Commonwealth Bank are sticking with predictions that nationwide house prices will rise 3 per cent this calendar year and 5 per cent next year.

But AMP Capital chief economist Shane Oliver suggests his “confidence is low” on residential property forecasts.

According to Oliver, who has also suggested prices will move up 5 per cent next year. “There is a high risk of another leg down in property prices … Mortgage rates are still rising, hitting homebuyer demand,” he suggests.

AMP Capital estimates the ­“capacity to pay” for an average borrower is nearly one-third lower than in April 2021.

Oliver says a price “downward adjustment” is now threatened unless “incomes rise dramatically or mortgage rates fall dramatically – both of which look unlikely for now”.

As the cumulative toll of higher interest rates loom, CoreLogic ­research director Tim Lawless has also pointed out that auction volumes remain below average on ­almost every measure.

“Total inventory levels are more than a quarter below average,” Lawless says.

He suggest any drop in prices in the months ahead would effectively create a double dip for home values, which fell 9 per cent from their peak of early 2021 before this year’s 3.4 per cent increase.

“The conditions are clearly in place for a double dip in property prices, which would be unusual in our market – I can’t remember having seen one. But then to see house prices rising as rates are going up is unusual too,” Lawless says.

Analysts suggest a reversal could confirm that the property price bounce this year was premature, leading to a period of flat prices or lower prices.

Inside this year’s upswing, most of the action has been at the upper end of the market where downsizers and new overseas buyers are not sensitive to interest rate rises – this pattern is expected to continue.

“Any future drop in prices will be felt most sharply at the middle and lower end of the market,” Lawless says.

Similarly, property experts ­expect major variations in ­regional prices to continue, with the Sydney and Perth markets leading the nation while prices ­remain soft in Canberra and Hobart, with Melbourne in the middle of the pack.

“I still think the forecasts of 3 per cent price growth this year and 5 per cent next year are not unreasonable,” Lawless says.

“We could get a downleg in the cycle now – but we have the buffer of the gains already made this year – you might find the long-range forecasts could still be accurate.”

Originally published as House prices heading towards a double dip as this year’s rebound shows signs of fading