Property prices may tumble 15 per cent after rate increases

If the Reserve Bank lifts official interest rates for the first time in more than a decade on Tuesday, as is widely expected, property prices will almost certainly take a hit, particularly if it is the start of a sustained period of higher mortgage interest rates.

Shane Oliver, chief economist at AMP Capital, says dwelling prices in Sydney and Melbourne could fall up to 15 per cent from their peak earlier this year by the end of 2023, or early 2024.

Eyes will be on the Reserve Bank of Australia on Tuesday to see if it lifts the cash rate for the first time in more than a decadeCredit: Louie Douvis

Analysts at three of the big four banks are now forecasting our central bank to pull the trigger on Tuesday.

Markets believe the RBA will likely increase the cash rate from 0.1 per cent to 0.25 per cent, with further rate rises to come.

Figures from RateCity show that if the cash rate rises to 0.25 per cent, a home buyer with $500,000 mortgage would see their repayments rise by $39 a month. A further rise in June to 0.5 per cent would see them paying $104 a month more.

The likelihood of the RBA moving earlier than initially expected follows the release of surprise data by the Bureau of Statistics showing headline inflation surged to 5.1 per cent in the 12 months ended March 31.

Louis Christopher, founder of SQM Research, believes rate rises continuing through the second half of this year and into next year would be a “pretty big negative” for the property market.

Although he is not predicting price falls as large as Oliver, he still sees dwelling prices falling by up to 7 per cent in Sydney and 8 per cent in Melbourne this year.

There are some reasons to think there could be a softer landing for prices, followed by a speedy recovery in prices, Christopher says.

“The labour market is tight and if we see an acceleration in wages growth, so that it catches up with inflation, that would be a positive for prices,” he says.

Andrew Wilson, chief economist at My Housing Market, expects property prices in the two major capital cities to fall a “couple of per cent” this year, after already moderating from their boom peak of the past two years.

“Melbourne and Sydney have consolidated those higher prices and there is no more capacity to grow at the spectacular rates of last year,” he says.

Rising interest rates will have a sobering effect on buyer sentiment, but demand for housing continues to outstrip supply, he says.

However, containing inflation will not just be a “light tap on the brakes” by the RBA, but a concerted period of higher rates, Wilson says.

Offsets to the dampening effect of higher rates include a strong economy, full employment, growth in wages and the opening of international borders and reintroduction of high levels of immigration, he says.

AMP Capital’s Oliver says there is a chance that the RBA would increase the cash rate by as much as 0.5 per cent on Tuesday, in an effort to get ahead of the inflation surge.

Either way, we are likely to have a cash rate of 0.5 per cent by mid-year, Oliver says.

He is forecasting official rates to hit 1.5 per cent by year-end, with further increases to come.

Markets are expecting an even higher cash rate of 2.5 per cent by the end of 2022.

“Fixed rates have already been increasing and variable rates will rise, which will substantially dampen prices, which we are already starting to see in Sydney and Melbourne,” Oliver says.