House Prices to Fall as Interest Rate Rises: CBA Predicts

The Commonwealth Bank of Australia predicts a small rise in house prices in 2022 followed by a dramatic downfall in 2023.

Prelude: The Reserve Bank of New Zealand hiked its interest rates by 0.25 per cent. This gives a clue that an interest rate hike could be coming to Australia sooner than expected. Of course, the rising interest rates will be a huge dampener on the house prices causing them to fall.

The New Zealand property market condition is similar to that of Australia. Post pandemic, even New Zealand saw a strong upsurge in housing prices and we believe it has started to get uncomfortable about that — as the property bubble might burst.

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Deep down, we all knew it was a bubble about to burst. Australian real estate market had a crazy rate of acceleration but the forecast for rising prices seems to have come to a sudden halt.

What happens to house prices when interest rates increase? 

The rising interest rate will become a headwind for property prices. The market is bound to crack under the pressure of high-interest rates causing house prices to fall. 

As inflation rise and wages go up, the interest rate takes a hike too. Therefore, it’s essential to watch the consumer price inflation and the wages index in the Australian market. Inflation is already higher than expected (aftereffects of COVID-19 pandemic) and wages have also shown a little bit of strength as lockdowns have lifted, borders have opened and businesses have started bustling. 

Looking at the economic conditions in Australia, the tightened lending rules by APRA, the possibility of higher interest rates and the ongoing housing affordability constraints will reduce the house prices more than expected.

The effects of the interest rate hike on Australian house prices

The Commonwealth Bank of Australia is predicting the house price growth rate to slow down substantially in 2022 and then fall back in 2023. Market watchers are predicting a price slump between 5 per cent to 10 per cent during 2023. 

ANZ is also predicting a similar pattern. They expect a more considerate downfall in house prices i.e. 4 per cent in 2023. But the bank’s economists do not expect official interest rates to rise until the first quarter of 2023.

Among other predictions, Shane Oliver, the chief economist at AMP Capital anticipates the interest rates to rise by the end of 2022 and the property prices to rise by about 5 per cent.

Although the Australian economy picks up steam, it would be advisable for the Reserve Bank of Australia to not lift the cash interest rate aggressively because of the high debt levels of households. 

Dr Oliver suggested that the central bank could divide the rise into two parts allowing the market to adjust to the changes. One, towards the end of 2022 as inflation picks up with an initial hike of 0.15 per cent (from the current cash rate of 0.1 per cent) quickly followed by a second rise of 0.25 per cent at the beginning of 2023. 

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Additionally, there could be a few other interest rate hikes taking the cash rate to about 1 per cent and that should probably be the end of it.

How does the rise in interest rate affect the homeowners?

If there’s a 0.9 per cent increase in cash rate through variable interest rate mortgages, the repayments will increase by more than 10 per cent. 

Assuming the new average variable mortgage to be 3.58 per cent from 2.68 per cent, a homeowner with an $800,000 mortgage for 30 years has to pay $3628 per month as their repayments increase by 10 per cent.

What will be the impact on property prices in Sydney and Melbourne? 

The property prices in Sydney and Melbourne set new records and made strong gains over the past 12 months. While it is unlikely to see a backward fall, the hike in interest rate is likely to slow down the rising property prices in the capital cities. 

Dr Oliver predicted Sydney and Melbourne property prices to rise by about 5 per cent in 2022. As the affordability constraints are stronger in Sydney, Melbourne’s price growth could outpace Sydney next year.

Moreover, the economists at ANZ are predicting the house prices in capital cities to rise by more than 6 per cent next year. They are marking Sydney property prices to climb by 5 per cent and expect Melbourne to do better with a gain of about 7 per cent. 

This might turn out to be beneficial for the Melbourne property market as it was highly affected due to the COVID-19 lockdowns. Compared to Sydney, housing affordability is better in Melbourne. 

Chances are that the housing prices in Melbourne may not rise as much as in Sydney because the remote work culture has hit interstate migration and closed borders have impacted immigration as well. 

As higher interest rates restrict the borrowing capacity of buyers, Angie Zigomanis of Charter Keck Cramer predicts a price rise of 5 to 6 per cent in Sydney.

What’s in store for 2022?

It is highly likely that the predictions about future price changes could affect the current market as well. If people believe the house prices are going to fall, they may hold off buying and selling causing the property market to fall sooner than predicted.

As they say, “Patience is a virtue” — people who will wait patiently to get their foot in the property market door might reap the benefits of low housing prices. 

While ANZ predicts Sydney property prices to be 5 per cent lower and Melbourne prices to fall by 2 per cent in 2023, Wilson from MyHousingMarket predicts a rise in property prices in both cities with the revival of the economy.

These contrasting predictions depict the current uncertainty in the property market right now. It will be fascinating to watch house prices in the last few weeks of 2021 and the first weeks of 2022.

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