House prices forecast to fall further 15pc

The property market is expected to drop a further 15 per cent next year as interest rate hikes start to bite.

An already cooling housing market is tipped to fall further in 2023. Picture: Gaye Gerard / NCA NewsWire

The national housing market is expected to fall sharply next year as impending interest rate hikes by the Reserve Bank hang over the economy.

Experts are predicting a 15 per cent drop in house prices over the next 18 months, after prices fell for the first time in almost two years last month.

The national house price average decreased by 0.11 per cent in May, according to research by PropTrack, led by declines of 0.29 per cent in Sydney and 0.27 per cent in Melbourne.

Though Sydney experienced its fourth-consecutive month of falling prices, May was the first month where the national average turned negative.

This came despite growth of 0.35 per cent in Brisbane and 0.58 in Adelaide.

AMP’s chief economist Dr Shane Oliver said people being priced out of the market was a significant driver, with prices surging at an unsustainable 29 per cent since the pandemic began, while wage growth stayed around 2.3 per cent.

AMP also attributed the decline to high inflation, rising mortgage rates, changing consumer spending patterns, a decline in consumer confidence and the beginning of monetary tightening by the Reserve Bank of Australia.

“The deterioration in affordability has priced many out of the market. But the main driver of the downturn is the upswing in interest rates,” Dr Oliver stated.

Analysts at Morgan Stanley said the RBA’s rate increase to 0.35 per cent last month had already hit the market.

“It is no coincidence that the first month of declining national prices coincided with the first rate hike since 2010,” the investment bank said.

“While sentiment has already been deteriorating for several months, rate hikes have a much more direct effect on actual and expected serviceability costs, as well as credit availability.”

“We expect the RBA to hike rates at most meetings this year (including next week) to see the cash rate at 1.75 per cent by December.”

“The tightening impact of this on housing means we continue to see national prices declining 5 per cent this year and 10 per cent next year, for one of the largest nominal declines on record,” Morgan Stanley warned.

Dr Oliver anticipated a similar trend, with national average property prices having now likely peaked.

“We continue to expect a peak to trough fall of around 10 per cent to 15 per cent,” he said.

That likely reflects “increased sensitivity to higher interest rates, property prices have also started falling a bit faster than we initially anticipated.”

Nonetheless, AMP’s forecasts for the remainder of the year were more conservative than Morgan Stanley.

“After 22 per cent growth in national average home prices last year, home prices this year are now expected to fall 2 per cent,” AMP said.

Despite the forecast, Dr Oliver said it was unlikely that the drop in prices would have severe impact on the market or wider economy.

“Seen in the context of the huge 29 per cent plus surge in prices since their 2020 low, this will just take average prices back to the levels around March last year, so a big rise in negative equity is unlikely,” he said.

He did, however, warn that homeowners could be less prepared for rising interest rates than previous cycles.

“Household debt to income and house price to income ratios are way higher than they were when the last rate hiking cycle started in 2009,” he said.

“RBA analysis suggests most households are well ahead on their mortgage payments and have built up significant buffers … so while there will be an increase in mortgage stress we do not expect to see an avalanche of forced selling,” Dr Oliver said.

But he added that the unknowns around how new borrowers will cope with higher rates was probably the biggest risk.

HSBC chief economist Paul Bloxham expects the RBA to be cautious and to lift the cash rate by 25 basis points at each of its next three meetings.

While the economist expects the next inflation figures due in late July to remain elevated, they would have also passed their peak.

“This (will) afford the RBA an opportunity to pause in September and October, to assess the impact of its 100 basis points of hikes. We expect the hikes to drive more falls in house prices (they are already falling) and weaken consumption (consumer sentiment is already weak),” he said.

HSBC said a critical factor would be a noticeable rise in the unemployment rate.

“We see slowing local and global growth, falling housing prices, and a reopened of the border driving increased labour supply, meaning the unemployment rate edges up through 2023,” Mr Bloxham said.

The economist expects rates to rise 175 basis points over a 12-month period which would slow growth by cooling the housing market and weakening consumer spending.

Meanwhile, Goldman Sachs economists Andrew Boa and Bill Zu expect the RBA to raise the cash rate to 2.6 per cent this year.

They warn that there are risks to normalising monetary policy in Australia, because of high levels of household debt and the “likely extended falls in house prices”.

But they added that the risks are manageable.

“Net housing debt (as a share of income) has actually fallen materially since the global financial crisis, the median Australian mortgagee is 21 months ahead on their mortgage repayments, seven years of macroprudential policy has substantially reduced risky lending, and our analysis on the composition of household debt and the implied rise in the debt-servicing burden looks manageable,” they said.

Goldman expects a 50 basis point rise at next week’s RBA meeting, against the backdrop of hawkish central banks overseas and current market pricing.

“The RBA may now be concerned that a ‘dovish’ 25 basis point hike would result in a deprecation of the Australian dollar and add to imported inflation,” they said.

Originally published as House prices forecast to fall further 15pc