CBA’s head of Australian economics predicts house price drop for 2023

CBA’s head of Australian economics has made a bold prediction for the future, claiming the market is “in the twilight of an incredible boom.”

The Commonwealth Bank has forecast a massive 10 per cent drop in Australia’s house prices in 2023 after a startling period of growth that has left new buyers feeling priced out of the market.

Housing affordability has deteriorated to its worst level in a decade in Sydney, despite record low interest rates, with the median house price hitting $1.3 million.

Analysis by Moody’s Investors Service found that a household with an annual income of $135,000 will spend more than 45 per cent of its money servicing its new mortgage, a dramatic increase from February where such a household only (relatively speaking) needed 36 per cent of its income,

While house prices are expected to continue to rise through 2022, CBA’s head of Australian economics Gareth Aird believes interest rates will help settle the market in a few years’ time.

“We expect an orderly correction in home prices of around 10 per cent in 2023 as the RBA takes the cash rate to 1.25 per cent by Q3 2023,” Mr Aird said.

“The Australian housing market is in the twilight of an incredible boom that has been fuelled by record-low mortgage rates.

“The phenomenal lift in prices is not over yet, given dwelling prices are still rising briskly in most capital cities. But near-term indicators of momentum, coupled with the recent move higher in fixed-rate mortgages, suggest that conditions will moderate from here.”

Mr Aird believes Australia could be seeing the end of its historic housing “boom”, which has seen prices in capital cities rise by as much as 25 per cent in 2021 alone.

“The price that someone is willing and able to pay for a home is predominantly influenced by two things – income and borrowing rates,” he said.

‘Near-term indicators of momentum, coupled with the recent move higher in fixed-rate mortgages, suggest that conditions will moderate from here.’

The Commonwealth Bank has forecast a massive 10 per cent drop in Australia’s house prices in 2023

“As home prices move higher, affordability becomes stretched. That can be improved via a reduction in mortgage rates or higher income.

“But at some point, the tailwind of lower mortgage rates on prices wanes unless there are further cuts in interest rates.”

Mr Aird said the international border reopening could see a decline in house prices compared to apartment prices.

“As such, we expect house prices to decline by a little more than apartment prices over 2023,” he said.

In terms of interest rates, Mr Aird said the bank was expecting to increase the cash rate to 1.25 per cent by July next year.

“The cash rate is forecast to lift because the economy will be at full employment and annual wages growth will have pushed to the desired level of 3 per cent,” he said.

“Stronger wages growth will provide a partial offset to rising interest rates on the property market.”

Mortgage rates in Australia sit at their lowest level on record after the Reserve Bank cut the official cash rate to 0.1 per cent last year, while the current average mortgage rate sits at 3.45 per cent.

“In Sydney, house affordability is at its worst than at any time in the past decade. Based on our modelling, Sydney will reach its worst housing affordability in 10 years if prices increase by 4.6 per cent or if average mortgage lending rates rise by just 0.42 percentage points to 3.87 per cent,” Moody’s Analyst Pratik Joshi said.

In Sydney, house affordability is at its worst than at any time in the past decade.

“Australia on average would reach its worst affordability in a decade if housing prices increase by 15 per cent or if the mortgage lending rate rises to its average for last 10 years of 4.79 per cent.”

In Melbourne, incomes are also being eaten up by mortgage repayments as its median house price creeps towards the million mark, currently sitting at more than $960,000.

Melbourne households are spending an average 32.1 per cent of their incomes on the mortgage, compared to 29.7 per cent in February.

While wage rises on the back of relaxed lockdown curbs could help cushion the impact of price increases, affordability could still get worse, it warned.

“Household incomes have been stagnant for the past year. The economic recovery after coronavirus restrictions ease will be positive for wages, though the influx of overseas workers once international borders reopen will dampen income growth,” the Moody’s report said.

“All up, we do not expect income growth to materially offset housing price gains over the rest of this year and into 2022.”

-- with Sarah Sharples