Australia’s house prices will take a dive this year and next as the combination of increasing mortgage rates and cost-of-living pressures drag on demand, a Reuters poll has found.
During the 2007-09 global financial crisis, house prices have doubled due to pandemic-related stimulus and cheap loans, increasing homeowners’ wealth, but it has also kept millennials and first-home buyers off the property ladder. Prices increased about one-third during the pandemic before dipping by 1.6% nationally in July – the largest month drop since 1983, dragging annual price growth down to 4.7%, from a peak above 21% late last year.
According to an Aug. 15-Sept. 2 Reuters survey of 10 property analysts, average home prices were forecast to fall by 6.5% this year, versus an expected 1% rise in a May poll, and by a further 9% next year.
“The property boom is well and truly over as the surge in mortgage rates is pulling the rug out from under it,” Shane Oliver, chief economist at AMP, told Reuters, “There are three reasons why this downturn will likely be deeper and the recovery slower than in past cycles: high household debt levels, high home-price-to-income levels, and an end in the long-term downtrend in interest rates.”
The Reserve Bank has already hiked rates by 175 basis points since May and is expected to increase rates further by another half-point on Tuesday to combat surging inflation.
Markers predict the current 1.85% cash rate to be near 4% by mid-2023. Banks have significantly increased borrowing costs on new fixed-rate mortgages and tightened lending standards.
“The path of interest rates will dominate the housing outlook,” Adelaide Timbrell, senior economist at ANZ, told Reuters. “A steep increase in mortgage rates between May and the end of this year will weigh heavily on house prices. Still, a substantial correction is required to return housing affordability and housing prices to fair levels.”
The more heavily indebted households, which currently have a record $2 trillion of mortgage debt outstanding, will also find themselves faced with a greater challenge.
ANZ, Bank of Queensland, Capital Economics, and Knight Frank said that for Australian housing to be affordable, average house prices would need to drop by 10-35% – roughly the amount US house prices tumbled during the global financial crisis.
Sydney, the world’s second-most expensive housing market after Hong Kong and Melbourne, will likely see house prices fall by 7-10% this year and 7% next, Reuters reported.
