Buying a house is hard now but it could get much worse

Interest rates falling to 2.6 per cent within a year seemed like a fantasy until the National Australia Bank made that bold call. And the ramifications for house prices are equally far-reaching.

We may need to brace for house price lift-off.

And Labor’s overwhelming success on election day has only cemented the bank’s forecast on the trajectory for rates.

House prices will surge if rates are slashed to 2.6 per cent over the year. Credit: Peter Rae

There is really only one direction for them to go: down. For house prices, a cut in rates (from the current cash rate of 4.1 per cent) of that magnitude will be an accelerant in a market that is already moving up, albeit at a timid rate.

Under this scenario, we could easily see housing prices rising into double-digit territory by year’s end.

And the Labor government’s housing policy, aimed at enabling first home owners to get a foothold in the market, will likely further spur demand and fuel house prices.

The forces that will motivate the Reserve Bank to lower rates are only getting stronger.

Housing is a hot-button issue in Australia, with younger people vying to get a foothold in a market that eludes many thanks to a couple of years of higher rates and declining affordability.

A cut in rates will bring out those who have been waiting on the sidelines of the market. However, rising prices will also put pressure on affordability.

The NAB expects the Reserve Bank to cut rates by 50 basis points in May, followed by 25 basis points in July, August, November and February.

NAB economists forecast rolling rate cuts this year.Credit: Penny Stephens

The other major banks are also lining up with forecasts on the Reserve Bank’s lowering of rates, but none are yet suggesting it will move to lower rates at the sort of velocity predicted by the NAB.

But the other three banks are all still predicting rates will fall to 3.5 per cent by the middle or end of this calendar year.

The forces that will motivate the Reserve Bank to lower rates are only getting stronger.

The most recent inflation data showed the consumer price index is inside the central bank’s target range of between 2 and 3 per cent.

But there is also a risk of the Australian economy slowing after the international ructions created by US President Donald Trump’s tumultuous trade policies. That could spur the RBA to lower rates more quickly than economists are expecting.

Meanwhile, there are a number of government programs in place that are designed to help new buyers enter the market. Chief among them will be the policy enabling first home buyers to purchase with just a 5 per cent deposit without having to pay Lenders Mortgage Insurance. Prices on eligible properties will also be lifted and there will be no income caps on numbers.

Additionally, there is Labor’s help-to-buy shared equity scheme, where the government covers up to 40 per cent of a home’s cost that first home buyers can buy out at a later date. That could be expanded this year.

Of course, Labor also has a policy to increase the number of homes being built, but this demand-side response will be slower to implement due to shortages in skilled tradespeople.

In the short to medium term, it won’t come close to catching the stimulatory demand created by a combination of lower interest rates and government assistance.

However, there is a wild card in any predictions of a tearaway increase in house prices that can’t be ignored.

According to research director at Cotality (formerly CoreLogic) Tim Lawless, there could be a financial regulatory response from the likes of the Australian Prudential Regulation Authority that may, for example, tighten loan-to-value ratios.

So for all Labor’s housing efforts, it’s hard to see much standing in the way of the property price cannonball.

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