Big banks’ backflip on house price forecasts signals rebound

A shortage of supply and a lift in immigration have combined to end the downturn and inject new life into property prices.

The nation’s biggest home lender, Commonwealth Bank, has all but confirmed the end of the housing downturn, joining a range of banks in scrapping its gloomy call for 2023 and replacing it with a forecast lift in prices.

With the Reserve Bank widely expected to extend a pause in interest rates this week, the change of heart among the best informed economists in the market will further stoke sentiment in a residential sector where prices had fallen around 9 per cent from a peak in early 2022.

CBA has revised its original forecast that home values would fall 6 per cent this year – instead it now says that prices will gain 3 per cent by the end of December.

Banks are falling over each other to revise – upwards – house price forecasts for the year ahead after a rebound in immigration mixed with rock bottom rental vacancy rates has changed the outlook for residential real estate.

New data on the housing market released on Monday from CoreLogic shows that home prices have now risen for two months in a row. Prices were up 0.5 per cent in April after an 0.6 per cent increase in March.

Sydney is clearly the city with the strongest rebound – prices in the city rose 1.3 per cent over the month of April. Sydney had also been the first city to see a decline in prices.

There are also signs that the price improvement pattern is widening beyond the major metropolitan centres – CBA says prices rose solidly in Sydney and Perth while values in Melbourne, Brisbane and Adelaide also edged higher.

Moreover, CoreLogic reported after the weekend that clearance rates – the proportion of houses for auction that sell at auction – are also stabilising. Melbourne reported a 78 per cent clearance rate over the last weekend, the strongest number since October 2021.

More broadly, the combined capital clearance rate figure came in at 69 per cent for the third week in a row.

Though bank economists have access to some of the best raw data on housing trends, most of the leaders in the local market over-estimated Australia’s house price decline while underestimating the powerful impact of both a housing stock shortage and rising population.

CBA has revised its original forecast that home values would fall 6 per cent this year – instead it now says that prices will gain 3 per cent by the end of December. Picture: NCA NewsWire / Damian Shaw

CBA’s Gareth Aird spelled it out in a note which says: “We did not pick the turning point in this cycle as we expected prices to continue to trend lower … the evidence is that home values bottomed in February.

“The underlying demand for housing has lifted due to much stronger than anticipated population growth. This has had implications for the rental market and by extension dwelling prices.”

Moreover, CBA goes one step further suggesting that home prices will rise 5 per cent in 2023 and the risk to the forecast for next year is firmly to the upside (that is, prices may move even higher than the bank suggests).

In recent weeks, all of the major banks have gone back to the drawing board on house price forecasts. NAB had estimated that peak to trough house price falls would be around 20 per cent but has more recently pared that estimate back to 12.5 per cent.

ANZ had originally pencilled in an 11 per cent price drop this year but in an updated note a week ago, the banks said prices would stay flat this year and rise by 3 per cent next year.

Westpac also backflipped on its gloomy forecasts made in 2022 with a revised position that suggested that instead of falling 7 per cent this year, house prices will hold flat before lifting 5 per cent in 2024.

Originally published as Big banks’ backflip on house price forecasts signals rebound