Borrowing power to cut house prices 18pc: ANZ

Borrowing power, not forced sales, will cause property prices to fall more than previousy expected, according to the bank.

ANZ has revised down its house prices forecasts, now expecting falls of 18 per cent by 2023. Picture: Gaye Gerard

ANZ has revised down its housing forecast and now anticipates capital city property prices to fall 18 per cent until early 2024.

Surging mortgage rates will cause prices to slip between 15 and 20 per cent by the end 2023, before recovering 5 per cent in 2024, the bank said in an update. ANZ had previously forecast property prices to fall 15 per cent from peak to trough over 2022 and 2023.

Smaller borrowing capacity rather than an increase in the number of forced sales is likely to push property prices lower.

The report expects the cash rate to hit 3.35 per cent by the end 2022, which equates with variable mortgage rates reaching just under 6 per cent. The change from the record low credit would cause a reduction in borrowing capacity by 30 per cent.

ANZ economists Felicity Emmett and Adelaide Timbrell, who authored the outlook, said the steeper than expected trajectory of interest rates would cause prices to fall further.

“Already housing finance data show that average new mortgage sizes are beginning to fall,” the report said. “We expect that the average share of household income that goes to mortgage interest payments will rise to nearly 11 per cent at the peak, much higher than the 9 per cent or so paid prior to the pandemic, but well below the 13.5 per cent peak in 2008.”

Forced sales are not expected to increase given the “strong position” of borrowers.

Despite more than half of payments on fixed rate loans being expected to jump over 40 per cent once the term expires, the pain is set to be offset by very low arrears rates, large savings buffers accumulated through the pandemic and the concentration of debt to wealthier households.

The forecast of a modest increase 2024 is predicated on the belief the cash rate will be cut in the latter half of the calendar year.

Construction is also set to fall 16 per cent over 2023 and 2024 as higher mortgage rates and lower house prices flow through to weaker approvals and then falling construction work. The report warned a fall in activity could create a drag on the economy.

Building approvals have come down and stabilised from the record highs of recent years, which were powered by pandemic stimulus. Much of the backlog from record housing approvals is expected to be worked through this calendar year.