House prices to drop by 20-25 per cent: Jarden

The investment bank has downgraded its housing outlook as higher interest rates bite, warning that property prices could fall by 20-25 per cent.

Jarden analysts have issued a gloomy outlook for property prices. Picture: Thinkstock

Investment bank Jarden has downgraded its housing outlook as higher interest rates bite, warning that prices could fall by 20-25 per cent.

The forecast is one of the gloomiest so far and comes on the back of a harsh line taken by the Reserve Bank against inflation as prices continue to spiral.

Jarden analysts had expected a fall of 15-20 per cent home price fall, with a bounce back of about 10 per cent in 2024, but have now taken a grimmer view as the Reserve Bank hikes rates. They now expect the cash rate to hit 4.1 per cent by May after the central bank’s hawkish shift to combat inflation.

“This is likely to see the average mortgage rate exceed 6 per cent in coming months and further reduce borrowing capacity, for a cumulative fall of more than 30 per cent,” the bank’s Carlos Cacho and Anthony Malouf wrote.

They said before Tuesday’s RBA meeting there was a cautious optimism in the housing market, with an expectation that the imminent end of the hiking cycle would allow house prices to stabilise.

“We believe the RBA’s hawkish shift risks up-ending this budding optimism, seeing prices decline further,” they wrote.

“Indeed, we now see too much downside risk to our long-held forecast of a 15-20 per cent peak-to-trough fall in house prices and downgrade to a 20-25 per cent correction.”

This would see a 15 per cent fall in 2023 and become the largest correction on record, driving national prices back down to 2020 levels, largely erasing the post-Covid boom.

“However, we now expect a stronger 10 per cent-plus recovery in 2024, driven by a combination of the Australian Prudential Regulation Authority lowering the serviceability buffer to 2 per cent, 1.5 per cent of RBA rate cuts from 2024 and the Stage 3 tax cuts,” they wrote.

But the tougher climate could see a 10 per cent drop in home loan flows, which would amount to a 35-40 per cent peak-to-trough fall, which would also slow housing credit growth.

Jarden said that further housing weakness suggests downside risk to expectations on residential settlements for Mirvac and Stockland, which could roll into the next financial year. Construction and building materials could also be hit by a decline in housing starts.

An easing by prudential regulator APRA could provide some relief. Jarden said the most likely candidate was APRA lowering the serviceability buffer from 3 per cent to 2 per cent, likely by September.

But it warned that if APRA did not ease the policy there was likely further downside risk for prices, at least until the RBA starts cutting rates. The analysts said that a mix of regulatory easing, rate cuts and the start of the tax cuts was likely to drive a strong rebound for housing in 2024.