RBA’s faster rate rises to accelerate housing decline: ANZ

ANZ senior economists Adelaide Timbrell and Felicity Emmett have tipped that house prices will slide by 5 per cent in 2022 and down further by 10 per cent over 2023.

The pair have increased their expected downturn from their previous forecast of a 3 per cent fall in 2022 and an 8 per cent decline in 2023 – resulting in a 12 per cent decrease between April 2022 and December 2023.

The previous forecast would have left prices 6 per cent higher than pre-pandemic levels.

The downgrade has followed on from ANZ’s recent pivot in its cash rate predictions, with it now expecting the Reserve Bank of Australia (RBA) to hike the cash rate to 2.6 per cent by early 2023, up from the previously tipped 2.35 per cent.

After the RBA lifted the cash rate by 50 bps in June, marking its largest rise in 22 years, the ANZ team tipped that the move would be repeated in August, after a more modest 25-bp bump in July.

ANZ head of Australian economics David Plank believes the RBA will proceed with the 50-bp increase after consumer price index (CPI) inflation data for the June quarter is released, as well as employment reports.

In a research note from last week, Ms Timbrell and Ms Emmett explained that as the average borrower has a large savings buffer, reduced borrowing power will be the key driver of the house price downturn ahead, instead of forced selling.

“Our recent housing report noted that a steep increase in mortgage rates over the coming year would weigh heavily on house prices via reduced borrowing capacity,” the note stated.

“This still applies, only the increase in mortgage rates is now expected to be larger and to come at a more rapid pace.”

Sydney and Melbourne house prices had already started slipping before the RBA’s first rate hike in May.

Canberra was next to record a price fall in May, its first since 2019.

“Many of the remaining capitals may not see housing prices fall until later in the year,” the ANZ note said.

“We expect Sydney and Canberra prices to fall the most over the forecast period.”

Adelaide is forecast to have the largest fall of any city over 2023, at 15 per cent, following a rise of around 6 per cent in 2022.

Canberra is also expected to see a price fall of around 14 per cent next year, although ANZ has also tipped that the national capital will slip by around 2-3 per cent in 2022.

All other cities are expected to see price falls around 10 per cent or less in 2023, although Sydney and Melbourne are facing the largest falls in 2022, which look to be of equal size.

However, stronger wage growth, high savings levels, open borders and continued economic growth are expected to cushion the fall in house prices, as interest rates continue to climb.

Recent surveys from ANZ, CBA and Westpac have shown consumer sentiment has crept towards historic lows, while expectations for house prices have also fallen.

The Westpac report noted that home-buyer sentiment is approaching “global financial crisis lows”, with most consumers expecting mortgage rates to rise by more than 1 per cent in the year ahead.

The Westpac Melbourne Institute Index of House Price Expectations meanwhile fell by 8.4 per cent, from 121.4 to 111.1. The index is still above 100, indicating more respondents expect prices to rise than fall.

However, across states, participants were more pessimistic in NSW and Victoria, where index readings were down by 11.2 per cent to 103.8, and down 9.9 per cent to 101.5 respectively.

In Queensland, optimism was still bountiful, with a 3.1 per cent rise in the state’s index, to 124.5.

Similar to ANZ, economists from CBA and Westpac have also tipped that ANZ will repeat the 50-bp hike, but they have set a date of July.

Meanwhile, NAB has predicted that there will be two back-to-back 50-bp rises over July and August.

[Related: NSW stamp duty growth soars above house prices]