House prices stabilise but interest rates could stay on hold

House prices have troughed earlier than expected with the stabilisation indicating the market has absorbed some of the impact of higher mortgage rates.

House prices have troughed earlier than expected with the stabilisation indicating the market has absorbed some of the impact of higher mortgage rates.

The market is facing upward cost pressures on new homes prompted by builder collapses and rising labour costs, which are crimping the ability of developers to supply affordable homes.

But analysts don’t expect the price recovery to prompt further interest rate increases as the Reserve Bank could leave rates on hold on Tuesday.

Citi analysts said the RBA board was aware of the risk of stronger overall growth in prices across the economy last month when it paused rates. They said the change in the home price cycle had been driven by stronger than expected migration combined with a tight rental market and an unusually low supply of existing homes offered for sale.

AMP chief economist Shane Oliver noted home prices in April and other indicators also suggested the home price downturn was over. “A surge in demand on the back of high immigration and constrained supply appear to be dominating the negative impact of higher interest rates,” he said.

AMP has lifted its property price forecasts to flat to up slightly for this year with a 5 per cent rise next year. But it cautioned that the risk of another down leg is high as interest rate hikes continue to impact.

National home prices continued to stabilise in April, according to the PropTrack Home Price Index. The researcher found home prices were up 0.14 per cent nationally in April. This year, the recovery has seen prices lift a cumulative 0.75 per cent.

PropTrack senior economist Eleanor Creagh said: “There is still a way to go in returning inflation to the (RBA’s) target range, but with the impact of higher interest rates yet to fully impact household cash flows, and set to do so in months ahead, we’re likely to continue seeing inflation move lower. This gives the RBA leeway for a continued period of patience in May.”

She cited tightness in the labour market, which could add to wages pressure fuelling inflation.