Australian bank predicts grim house price drops in next year

It’s no secret that house prices are falling, but the rapid increase in interest rates is spelling bad news for the property market.

House prices could fall by a whopping 20 per cent in the next year in Sydney and by 17 per cent in Hobart, a new forecast has found.

Brisbane house prices could also drop as much as 15 per cent – nearly double what was previously predicted – as values fell more drastically since interest rates have been hiked from a record low of 0.1 per cent to 2.6 per cent, Me Bank said.

It has also predicted that Melbourne and Canberra will see price slumps of 15 per cent, while house prices in Adelaide are set to suffer a 13 per cent drop, more than double the bank’s previous forecast.

It’s a dramatic increase from its predictions in June where Me Bank flagged house prices would fall 8 per cent in Brisbane and 6 per cent in Adelaide.

The bank also predicted Sydney would drop by 15 per cent, Melbourne by 11 per cent, Hobart by 12 per cent and Canberra by 10 per cent.

A 15 per cent drop in the median property price would see the value of the average property falling by $150,000.

Wondering what can cause falling house prices? Check out Compare Money's guide >

Sydney house prices could fall as much as 20 per cent in the next year. Picture: NCA NewsWire/David Swift

Although Perth and Darwin were predicted to experience the smallest drops, at 8 per cent and 7 per cent respectively, those figures still jumped from 3 and 4 per cent back in Me Bank’s June’s predictions.

Peter Munckton, Me Bank chief economist, said further interest rate rises will mean house prices may decline further, prompting sellers to be more cautious.

“While property prices and stock on the market may be lower, buyers who can afford the higher interest rates may benefit from lower house prices,” he said.

“Property prices may continue their downward trajectory until the peak of the cash rate rise is reached. Financial markets are predicting that the cash rate may reach its peak in the first half of 2023.”

House prices could fall by hundreds of thousands. Picture: Supplied

What the major banks predict

NAB also found that house prices are set to plummet even further next year with an overall drop of 23 per cent in some states between 2022 and 2023.

Hobart was set to suffer the biggest drop in 2023 with prices to plunge by 16.6 per cent, after falling this year by 6.4 per cent.

However, Melbourne house prices were expected to plummet even further at 23.2 per cent in the next two years, the bank’s quarterly survey of the residential property market found.

Sydney is expected to suffer the biggest drop in house prices this year at 12.9 per cent, set to be followed by an extra 9.4 per cent in 2023.

Further rate hikes are expected from the Reserve Bank of Australia. Picture: NewsWire/Monique Harmer

Westpac warned Aussies about an 18 per cent fall in Melbourne and Sydney by the end of next year, which was also forecast by Commonwealth Bank.

ANZ also released a similar forecast, with capital city prices tipped to drop by 18 per cent by the end of next year before climbing by 5 per cent in late 2024.

House prices could plummet by as much as 43.5 per cent in 2025 in the “worst case scenario” if the Reserve Bank of Australia continues to push through super-sized rate hikes to tackle the worst inflation in three decades, alarming analysis also found.

Homebuyers don’t necessarily need to wait to buy. Picture: NCA NewsWire/Gaye Gerard

What should homebuyers do

For buyers, Me Bank head of home loans James Sheffield encouraged buyers to think long-term when it comes to navigating the property market.

“Picking the peaks and troughs is difficult and depends on your objectives and time frame. If your objective is to buy a home to live in then you don’t need to worry as much about short-term changes in value – just focus on finding a home you like at a price you can afford,” he said.

Mr Sheffield also expected competition in the home loan market to continue.

“Refinancing will remain a significant driver of home loan activity over the next year given the large number of fixed-rate loans that are due to roll off by the end of next year,” he said.

“Consumers are also looking to save money wherever they can. In an increasing rate environment with increasing cost of living, record high inflation and negative news at every turn, consumers will continue to look around for a good home loan deal.”