Property market outlook ‘bleak’ well into next year amid soaring interest rates and inflation

The coming 12 to 18 months will see property sales and prices restrained as interest rate hikes, inflation and low consumer sentiment continue to impact the sector, analysts warn.

The combination of interest rate rises, inflation, declining property values and low consumer sentiment has prompted credit rating agency Moody’s to warn the nation’s residential property market will be impacted well into next year.

But the agency said that the extent of the downturn would be cushioned by low rental vacancy rates, which would support investor demand when interest rates stabilise.

While buyers enjoyed low interest rates and targeted government stimulus, namely the HomeBuilder Program, from late 2020 to early this year, the rest of 2022 and the near future holds a tough 12 to 18 months.

Moody's Investors Service’s new report offers residential fundamentals as positive to “bleak” property climate. Picture: Ramin Talaie/Bloomberg

Moody’s said in a report that the easing of stimulus following Covid-19 and the onslaught of rate rises from the Reserve Bank would continue to restrain property market transactions and prices.

As inflation sits at 7.3 per cent over the past year as of September and the cash rate at 2.85 per cent, Moody’s expects inflation to remain above target levels into the fiscal year and for further rate rises to come.

However despite this, the credit agency’s senior vice president Mathew Moore said that residential fundamentals will remain steady in the long term.

“The return of foreign migration, population growth recovery, limited housing and land supply, and strong employment in Australia will likely limit the severity and duration of the housing market downturn,” Mr Moore said. “In addition, historically low vacancy rates will support investor demand when interest rates stabilise.

The Reserve Bank of Australia has hiked interest rates seven consecutive months. Picture: NCA NewsWire / Nikki Short

Moody’s said the property downturn would also weigh on the credit quality of financial institutions and regional and local governments.

While developers and building material producers are at most risk, the credit giant says the companies’ strong balance sheets and asset diversity will help soften the blow on their credit quality.

It added that banks’ solid capitalisation and provisioning would provide a strong buffer against higher credit costs from a weaker housing market.

Buyers enjoyed low interest rates and government stimulus for a few years, now rising interest rates paint a different picture for the near future.

Meanwhile, Westpac Housing Pulse Survey called the property market climate “bleak” with a housing correction firmly entrenched in buyer sentiment and in most markets.

The bank said that price-driven improvements in affordability are being negated by the ever rising interest rates and expectations for prices and labour markets.

Across the country, NSW and Victoria housing corrections look firmly entrenched, while in Queensland, Tasmania and the ACT are experiencing material price declines with SA and WA holding up best.

“Housing is now hostage to the policy and economic cycle,” Westpac senior economist Matthew Hassan said.

Originally published as Property market outlook ‘bleak’ well into next year amid soaring interest rates and inflation