House prices to fall 14 per cent over 2023 and 2024, Westpac warns

Economists at one of Australia’s biggest banks have predicted a huge drop in property prices before the end of 2024.

Economists at one of Australia’s biggest banks have predicted a huge drop in property prices before the end of 2024.

House prices could drop by 14 per cent over the next two years, Westpac economists predict, as strong inflation forces the Reserve Bank of Australia (RBA) to start lifting interest rates from August this year.

Westpac expects property prices to post a net gain of two per cent this year before falling seven per cent in 2023, and a further five per cent in 2024, “stabilising towards the end of that year”.

“In January, we moved to the view the RBA would begin its tightening cycle earlier and hike rates further, the cash rate forecast to begin rising in August 2022 to a peak of 1.75 per cent in March 2024,” Westpac’s chief economist Bill Evans said.

“The shift brings forward the timing of an anticipated correction phase for housing markets and means it will extend into 2024.”

Economists at one of Australia’s biggest banks have predicted a huge drop in property prices before the end of 2024. Picture: Gaye Gerard/NCA NewsWire

Mr Evans, along with Commonwealth Bank head of Australian economics Gareth Aird, AMP’s chief economist Shane Oliver and Deutsche Bank’s Phil O’Donoghue are all tipping rates rises from August.

Westpac economists say from that point they will continue to peak until they hit 1.75 per cent in March 2024.

The RBA cut the cash rate to a record low of 0.1 per cent in November 2020, where it’s remained while the bank has bought more than $350 billion in state and federal government bonds as part of its quantitative easing program.

A combination of supply chain blockages, increased unemployment and inflation pressures have forced the bank to reassess its initial belief that interest rates were unlikely to start climbing again until 2024.

Westpac economists say from August rates will continue to peak until they hit 1.75 per cent in March 2024. Picture: NCA NewsWire/John Gass

RBA governor Philip Lowe told the House of Representatives economic committee on Friday that while lifting interest rates too early could prevent unemployment tumbling to “historic lows”, the bank also had to consider inflation pressures.

If the next two inflation reports – due in April and July – were in line with the RBA’s expectations for the economy, Dr Lowe warned a rate rise might soon follow.

“If the economy tracks in line with our central forecasts, then an interest-rate increase will be on the agenda some time later this year,” he said.

But, he added, the RBA would lift interest rates only if the economy could support it, and any increase would be readily absorbed by the median household, now carrying a two-year buffer on their mortgage repayments.

“The economy does have quite a lot of underlying growth, momentum and resilience. We’ll be increasing interest rates in an environment where the economy’s doing well,” Dr Lowe said.

Australian Reserve Bank governor Philip Lowe. Picture: James Brickwood/AFR News

As the RBA starts normalising interest rates, Mr Evans and fellow senior Westpac economist Matthew Hassan warned housing would be “collateral damage”, with the sector “highly sensitive” to rate changes.

“With affordability already stretched in many markets, rate rises will have a direct impact on the borrowing capacity of buyers and their ability and willingness to sustain high prices,” they said.

“By the end of 2024, the mix of lower prices and higher incomes will have more than offset the effect of higher rates, restoring affordability to more normal levels for most markets.”

They believe prices in Sydney – which rose 29.8 per cent over the last 12 months – and Melbourne – where they climbed 17.8 per cent – would be flat this year, fall nine per cent in 2023 and drop five per cent and six per cent respectively in 2024.