The research from REA Group data business PropTrack has shown capital city house prices have surged by 22 per cent over the past year, one of the fastest rates of growth in Australian history.
The current rate has been beaten by a 29 per cent rise in the 1980s, as financial deregulation came into effect.
Foreign banks were introduced into the local market, bringing competition and improving access to credit and facilitating the house price boom in 1989.
However the rapid price growth culminated in a financial crisis, REA noted, which weighed on house prices in the following years.
Meanwhile the top recorded price growth took place in 1950, in which prices more than doubled, skyrocketing by 111 per cent, with the end of the government’s wartime price and rent controls.
PropTrack economist Paul Ryan commented that while the previous episodes of strong price growth have been followed by falls, it is “hard to see the same downturns befalling the current market, at least in the near-term”.
“The outlook for price growth in the coming period appears solid, if unlikely to be as exceptional as we’ve seen over the past year,” Mr Ryan said.
“While the large number of property listings, particularly in Sydney and Melbourne as they come out of the most recent lockdowns, may put some downward pressure on prices, there remains a very high number of buyers in the market on realestate.com.au waiting to find their new home.
“APRA has implemented some tightening of credit conditions, but overall borrowing conditions remain very favourable, and the RBA reaffirmed its expectations that interest rates would not rise for another two years, at least.”
House prices to fall in 2023: ANZ, CBA, Westpac
While PropTrack believes an incoming price correction is unlikely, economists from CBA have projected a 10 per cent fall in house prices in 2023, to coincide with a cash rate rise to 1.25 per cent.
Similarly, Westpac released a forecast on Tuesday (23 November), tipping price growth will moderate from a 22 per cent gain in 2021, to a more sedate 8 per cent rise in 2022, before a 5 per cent correction in 2023.
Meanwhile, ANZ has forecast a price fall of 4 per cent in 2023, to follow a 6 per cent rise in 2022 and a 21 per cent surge in 2021.
The analysis from CommBank Research has tipped Australian house price growth will moderate over the first half of 2022, due to higher fixed mortgage rates, affordability constraints and “natural fatigue”, following an extended period of extreme price surges.
The bank has forecast roughly 22 per cent price growth for dwellings over the 2021 year, with a 7 per cent rise tipped to follow in 2022.
But CBA economists expect the Reserve Bank will begin to raise the cash rate from November next year, which will dampen prices.
If true, property prices will hit their peak in 2022.
“In many respects it’s a simple story,” the issues paper from Gareth Aird, head of Australian economics at CBA stated.
“The price that someone is willing and able to pay for a home is predominantly influenced by two things – income and borrowing rates. As home prices move higher, affordability becomes stretched.
“But at some point the tailwind of lower mortgage rates on price wanes unless there are further cuts in interest rates.”
CommBank economists expect the cash rate will lift as Australia reaches full employment and wages growth are pushed to 3 per cent.
The bank has pencilled in a first increase of 15 basis points in November next year, which would take the cash rate to 0.25 per cent. A further rise in December of 25 basis points is expected, with three additional hikes of 25 basis points in Q1 2023, Q2 2023 and Q3 2023, which would take the rate to 1.25 per cent.
“Rising rates will put downward pressure on the demand for credit which will result in dwelling prices correcting lower,” the research note explained.
“Indeed rising rates work in much the same way falling interest rates generate an increase in demand for credit and higher home prices.”
However, the forecast is still reliant on a number of conditions, including the timing of the Reserve Bank’s monetary policy movements. CBA expects that if the RBA tightens policy later, it would expect a “shallow tightening cycle” and a smaller decline in home prices in 2023.
Likewise, other regulatory policies, such as APRA’s lending curbs could affect price rises next year.
The research note pointed to APRA’s recent serviceability buffer increase along with lenders’ recent moves to lift their interest rates on fixed rate mortgage products, in line with higher funding costs and the RBA abandoning its yield curve target.
The two factors are expected to dampen the demand for credit – which in turn, will make it less likely for APRA to roll out further lending curbs to cool down the market.
“The share of new lending that has been fixed over the pandemic as opposed to floating has been a lot larger than usual because fixed rates have generally been lower than the standard variable rate,” the note stated.
“The increase therefore in the interest rates on fixed rate mortgages will have a larger than usual cooling influence on the demand for credit. In addition, the lift in the fixed rates is a reminder to would-be borrowers that interest rates can move higher.”
Apartments are also tipped to overtake house price growth, as the borders reopen and there is a shift in demand. CBA has tipped 9 per cent growth for units and 6 per cent for houses next year, compared to their respective 14 per cent and 25 per cent forecasts for 2021.
Mr Hassan from Westpac warned the property market could be shaken by oversupply.
“Potential risks of oversupply stem from a combination of high levels of new building and an extended period of slow population growth due to closed borders,” he said.
“If higher levels of supply continue without a strong return to pre-pandemic population growth, we may see a slight oversupply emerging in 2023-24. If population-driven demand for new dwellings returns, oversupply risks look unlikely.”
[Related: Housing affordability down 15.6%: Bluestone]
Sarah Simpkins is the news editor across Mortgage Business and The Adviser.
Previously, she reported on banking, financial services and wealth management for InvestorDaily and ifa.