ANZ has forecast average capital housing prices to rise just over 20 per cent in 2021, up from its March forecasts of between 15 and 20 per cent.
In their analysis of the housing market, ANZ senior economists Felicity Emmett and Adelaide Timbrell said that the forecast upgrade is a reflection of stronger than expected performance of the housing market to date, with the Delta variant of COVID-19 unlikely to derail the growth.
However, it is expecting more tame average price gains of 7 per cent in 2022, given the increased uncertainty around the outlook amid the third wave of COVID-19, slightly higher fixed mortgage rates, and the prospect of regulators pulling macroprudential levers.
Across the capital cities, the economists have predicted that house prices would rise by 24 per cent in Canberra, 23 per cent in Sydney and Hobart, 21 per cent in Brisbane and 20 per cent in Melbourne.
In March, the major bank expected Sydney and Perth house prices to climb by 19 per cent, followed by Hobart (18 per cent), Melbourne and Brisbane (16 per cent), and Adelaide (13 per cent).
House prices rose by 1.9 per cent month-on-month in July, and were up 6.6 per cent over the previous three months, with Sydney and Brisbane leading the pack (up 2.1 per cent month-on-month).
Prices also rose in Hobart (up 1.9 per cent), Melbourne (up 1.8 per cent), and Adelaide (up 1.8 per cent), while Perth prices increased by 0.8 per cent.
House prices are now well above year-ago levels across all capital cities, according to ANZ.
The major bank added that recent growth in housing finance suggested that prices would continue to rise strongly in the coming months.
While owner-occupiers were the early drivers of this growth, investor lending surged by 55.0 per cent over the six months to June, and has more than doubled since June last year.
Lending to owner-occupiers rose by 23 per cent over the six months to June, but has slowed slightly due to a pull-back by first home buyers. Lending in this segment fell by 3.0 per cent.
ANZ observed that FHB lending would continue to trend lower due to housing affordability constraints.
Nevertheless, FHB demand has remained high for now, with analysis of Australian Bureau of Statistics (ABS) data showing that FHB loans reached a new peak of $456,000 in June 2021. New upgrader loans were also significantly higher this year than previously, at an average of $671,000 in June.
The ANZ economists have flagged that house price growth could outpace their forecasts in both 2021 and 2022, particularly if macroprudential tightening is delayed. However, the increased uncertainty around the Delta outbreak and extended lockdowns could pose some offsetting downside risks.
While the major bank still expects regulators to step in with the introduction of macroprudential measures to cool the red-hot housing market and had previously expected this to occur before the end of 2021, it said that the increased uncertainty may delay the timing.
It predicted that the Australian Prudential Regulation Authority (APRA) may introduce more than one measure, with the choice depending on the evolution of Delta over the next couple of months.
The ANZ economists said: “Fine tuning a gentle slowdown in the housing market will be a challenge, especially given the uncertainty around the outlook.
“The regulators will want to avoid triggering a sharp turnaround in house prices, so we expect that they will go lightly in the first instance.”
The Council of Financial Regulators (CIFR) has been flagging policy options to tackle housing market risks.
The Reserve Bank of Australia (RBA) governor Dr Philip Lowe recently said that these options could include increasing the buffer on the mortgage rate to determine serviceability (currently at 2.5 per cent) and targeting high loan-to-value ratio (LVR) or high debt-to-income (DTI) loans.
Dr Lowe recently told the House of Representatives standing committee on economics that the RBA and APRA are preparing to intervene should lending standards deteriorate, and said he “couldn’t rule it out within the next year”.
However, he said that he has not yet seen any signs of deterioration in lending standards.
[Related: ANZ mortgage book slims]
Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.