Recovery on the way for capital city home prices: SQM Research

The nation’s capital cities could see dwelling prices rise between three and seven per cent, with a housing expert flagging a ‘recessionary hard landing’ is not on the cards.

Australia’s capital city dwelling prices will begin to go into recovery next year, with Sydney leading the way in the market recuperation, according to a forecast by research house SQM Research.

The call is premised on interest rates stabilising next year, which would give homeowners and prospective buyers a breather on rising mortgage rates and contrasts with the gloomier forecasts of some major bank economists.

In his latest Housing Boom and Bust report, SQM managing director Louis Christopher has revealed the firm’s base case scenario is for metro dwelling prices could rise between 3 per cent to 7 per cent.

This is expected to be driven by a shortage of rental accommodation, workers returning to offices, new land tax changes and a surge in demand for residential property due to an increase in overseas arrivals, which Sydney will benefit from as a gateway city.

Recent moderate rises in auction clearance rates in Sydney’s eastern suburbs are also a positive signal of economic improvement, with SQM pointing to dwelling prices rising by 5 per cent to 9 per cent in the city in 2023.

In Melbourne, prices are forecast to move at a slower pace between 1 per cent to 5 per cent and Brisbane is also expected to lift by between 1 per cent to 5 per cent.

For Perth, rising employment and interstate migration have SQM predicting a rise of between 4 per cent to 8 per cent.

Eastern suburbs of Sydney city around the harbour.

These figures hinge on SQM’s base model which sees interest rates set by the Reserve Bank sitting no higher than 4 per cent, inflation peaking at 8 per cent before falling back to 5 per cent and unemployment staying under 5 per cent.

The parameters of the base case rely on a pause in interest rate hikes, which the research house expects to occur by June next year.

Mr Christopher said that as long as the cash rate stays below 4 per cent that it would be unlikely forced sales in the housing market would occur.

“No doubt it will be a very challenging year for the RBA to walk their tightrope and pull off a soft landing for the Australian economy,” Mr Christopher said, “However, contrary to current popular opinion, I believe they will manage to do just that.”

“We likely see an economic slowdown but not a recessionary hard landing. That is not to see it won’t be a close call,” he said.

Should the central bank move to increase rates above 4 per cent, which SQM deemed as unlikely, the risk of a hard landing for both the economy and housing market could arise.

SQM Research MD housing expert Louis Christopher.

SQM prepared three other possible scenarios for the capital city dwelling prices, which includes the worst case of a “recessionary inflation” breakout.

In this case, inflation would be stuck above 7 per cent, unemployment would lift to over 6 per cent and interest rates go above 4 per cent.

This would prompt capital city dwelling average prices across Australia to sink further into negative territory, with a drop of 3 per cent to 6 per cent in 2023.

While rises in rent remain strong across most of the nation’s cities, SQM expects a peak in the rental market late next year as dwelling completions rise and as renters move to become home buyers.

Rents are forecast to rise between 8 per cent to 13 per cent in 2023.

The report comes as the RBA flagged last month that home prices could drop by 20 per cent due to buyer pessimism, with bank documents obtained through Freedom of Information showing weak housing prices could impact dwelling investment.

Bank economists have warned for months that house price falls across the nation will continue until there is a 15-20 per cent decline from peak levels. They have warned that the declines could be as bad as US housing drops in the Global Financial Crisis, causing wider economic pain, along the lines of SQM’s worst case scenario.

Originally published as Recovery on the way for capital city home prices: SQM Research