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The bank has brought forward its forecast for prices to flatten by May 2022 rather than in the second half of the year ahead of a decline during the December quarter in response to anticipated rate rises in August and October.
With house prices expected to drop 7 per cent in 2023 and a further 5 per cent in 2024 – resulting in a total fall of 14 per cent over a two-and-a-half-year period.
“In level terms, this means prices at the end of 2024 will be on a par with their level in April last year,” said Westpac chief economist Bill Evans and senior economist Matthew Hassan.
“The peak to trough decline is comparable to most previous price corrections over the last 40 years when measured in real, inflation-adjusted terms, but milder than the Sydney and Melbourne price corrections in 2017-18.”
The Westpac economists said that housing would be collateral damage in the RBA’s efforts to keep inflation within its target range (between 2 and 3 per cent) over the medium-term.
“The sector is highly sensitive to interest rate changes. With affordability already stretched in many markets, rate rises will have a direct impact on the borrowing capacity of buyers and their ability and willingness to sustain high prices,” they said.
“The extraordinary surge in prices over the last year has seen affordability deteriorate to be near previous lows in 2010 and 2007 – both of these earlier benchmarks were at times when the average discounted variable mortgage rate was materially higher than it is now.”
Westpac’s forecasts suggest national house prices will rise 2 per cent in 2022 including rises of 8 per cent in Brisbane and Adelaide and 2 per cent in Perth. Whereas, Sydney, Melbourne and Hobart are expected to end the year flat.
The bank said house prices in markets facing more stretched affordability will be “more sensitive” to interest rate rises.
Prices to drop in 2023
Looking ahead, Sydney and Melbourne are forecast to have the largest falls during both 2023 and 2024 with drops of 9 per cent for both cities in 2023 followed by a 5 per cent fall for Sydney and 6 per cent for Melbourne in 2024.
In comparison, Westpac expects house prices in Perth and Hobart will drop 6 per cent during 2023 while prices in Brisbane and Adelaide will drop by 4 per cent.
The decline in these capital cities is then expected to ease throughout 2024 with Brisbane, Perth and Adelaide ending the year down 1 per cent and Hobart down 2 per cent.
“By the end of 2024, the mix of lower prices and higher incomes will have more than offset the effect of higher rates restoring affordability to more normal levels for most markets,” said Mr Evans and Mr Hassan.
“However, with the RBA successfully achieving its target of sustainable inflation within the target zone without needing to adopt a sharply contractionary stance prospects for a near term rate cut cycle will be remote.”
The economists concluded that housing markets will need to adjust to the prospect that, in the absence of some “major shock like COVID or the GFC”, rates are unlikely to ease in the foreseeable future.
[Related: RBA to hike cash rate in August: Westpac]