Property prices in most Australian cities are expected to fall by double-digit figures after the Reserve Bank of Australia hit the interest rate brakes harder and faster than earlier forecast, crimping the size of loans households can borrow, economists say.
The RBA’s 50 basis point cash rate rise on Tuesday, the biggest in 22 years, was larger than most analysts had forecast, prompting major banks and investors to revise their estimates of the pace and size of further increases.
“There has been a clear shift in tone and stance from the RBA board and we now expect the RBA to front-load rate hikes,” said Gareth Aird, head of Australian economics at CBA, the country’s largest lender.
As borrowing costs have rise, GDP growth has slowed faster than predicted, dragging household consumption lower and accelerating the downturn in average property prices.
“Based on our updated forecast for the cash rate we expect home price falls nationally of around 15% over the next 18 months,” Aird said, adding prices in Sydney and Melbourne are likely to slide by more than the other capital cities.
The decline, though, would be “a natural response to rising interest rates given it was record low interest rates that drove the phenomenal lift in prices in 2021”, with average prices soaring by more than one-fifth, Aird said.
The expected price decline would also be a drag on consumer confidence to the extent that household wealth would wilt along with home values. CBA on Thursday cut its forecast growth for the economy to 3.5% from 4.7%, while next year GDP will expand 2.1%, or a full percentage point slower than previously predicted.
From a peak around the start of 2022, dwelling values have been turning lower both in the capital cities and also in the regions. (Source: @corelogicau ) pic.twitter.com/q7LPGeo7lY
— Peter Hannam (@p_hannam) June 9, 2022
CBA also lifted its prediction for headline consumer price inflation to peak at 6.2% later this year from an early maximum pace of 5.75% forecast just a month earlier. The acceleration in inflation, led lately by energy and food prices, was the prime reason for the RBA to ditch its earlier pledge to be patient before starting its rate rise cycle.
Tim Lawless, research director of property data group CoreLogic, had predicted the drop in property values to be as much as 10% before the RBA’s surprisingly large increase of 75 basis points in its May and June rate rises. These were also the first back-to-back monthly moves since 2010.
“We’re probably going to be seeing those declines being brought forward at the very least, as rates move through higher, faster, and also see more cities moving to a decline [in property prices] earlier,” he said.
Some falls are already under way, with Melbourne posting a slide lasting six months so far and Sydney four.
Sydney and Melbourne are leading falls in dwelling values, while Adelaide remains one capital where prices have lately perked up. (Source: @corelogicau ) pic.twitter.com/NN2WcHfPbH
— Peter Hannam (@p_hannam) June 9, 2022
“But most of the other capital cities are clearly losing steam and we’re expecting that will probably be a trend that will continue, if not sharpen, up as we see rates move higher,” Lawless said.
The last downturn in prices was between mid-2017 to mid-2019, with a slide of almost 10% nationally. For Sydney, the drop was about 15% with Melbourne declining 11%.
Perth and Darwin's dwelling prices have also lately been on the rise, for now at least. (Source: @corelogicau ) pic.twitter.com/0oK66Zlk4m
— Peter Hannam (@p_hannam) June 9, 2022
The two biggest cities were probably more exposed to larger downward pressure as they faced demographic headwinds from migration to other states. While overseas immigration is starting to pick up, demand will initially be in the rental market, rather than home buying, Lawless said.
Brisbane’s decline may be limited because of net migration into Queensland while Perth may dodge the drop altogether. Perth’s in a state “where unemployment is already below 3% [and] jobs growth is quite strong”, he said. “It’s driven by commodities which are going to be fairly healthy going forward.”
Sally Tindall, research director at RateCity, said that demand for housing was already being sapped by the two rate rises as banks reduced the maximum amounts they would lend.
The consultancy’s research showed a single person earning $100,000 before tax with no dependents and no debts would be able to borrow an estimated $51,000 less following the 0.75 percentage point increases in lending rates.
Assuming Westpac’s forecast that the cash rate will rise from 0.85% after Tuesday’s increase to 2.35% by next April, that person’s maximum borrowing amount will have been slashed by $128,000. The RateCity estimate includes forecast wages growth.
“Borrowing capacity does have an impact on property prices,” Tindall said. “When interest rates were on the way down, people would go to the bank [and] they would find that they could actually borrow more than they potentially expected, which meant that they could bid more at auctions.”
“Now the reverse is happening,” she said. “It’s going to affect the people that were planning to borrow at capacity or near capacity as those interest rates rises kick in.”
The declines could generate their own tailwinds, as higher borrowing costs “leave some investors spooked by the property price forecast”.
“Most people aren’t enamoured with the idea of buying at the peak,” she said.
The price falls could be painful for some, particularly those whose mortgages become larger than their shrinking home value. Such borrowers would face a “mortgage prison” where it will be more different to change to another bank, limiting their refinancing options, Tindall said.
Price falls, though, should not amount to a crash, CBA’s Aird said.
“The low jobless rate means households will continue to pay off mortgages but higher rates come at expense of less discretionary spending” by households, Aird said.
While his bank is yet to predict how home prices will fare in 2024, the bank expects the RBA to start cutting interest rates again as inflation eases by late 2023, helping to stabilise the housing market.
Australia's household debt may be among the highest in the world but, so far, the debt loads are manageable, economists say. pic.twitter.com/YUF1MQmazn
— Peter Hannam (@p_hannam) June 9, 2022
One sector likely to do less well will be the real estate industry itself.
“They’ve had the benefit of quite a spectacular upswing and record levels of commission,” Lawless said. Sales are already down from record levels and may sink below average levels.
“There’s definitely going to be less money to be made in the real estate sector,” he said.
