A significant drop in house prices is expected to occur sooner than expected based on revised forecasts based on the current Reserve Bank of Australia tightening cycle.
While the Commonwealth Bank of Australia predicted in June that home prices would fall nationally by about 15 per cent over the next 18 months, unexpected factors prompted changes to the forecast schedule.
“We have not changed our expectation that national house prices will fall from peak to trough by approximately 15 percent. But now we see that the bottom was reached earlier as prices are falling at a slightly faster pace than we anticipated,” said a bank report released on Friday.
With the RBA now expected to cut the cash rate by 50 basis points in the second half of next year, the CBA said house prices are likely to start rising modestly by the end of 2023.
The CBA scenario hinged on the RBA delivering 75 basis points of rate hikes in the coming months, taking the cash rate to a high of 2.6 percent.
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“As such, our home price forecasts are conditional on a 2.60 percent cash rate peak,” the report said.
“We would anticipate a larger drop in house prices if the RBA raises the cash rate higher than our terminal rate forecast.”
The change in forecast was also due in part to a shortening in the time between changes in the cash rate and their impact on house prices.
“The current RBA tightening cycle is a good example,” the CBA said.
“The peak in house prices nationally was in April 2022. House prices started to slide as soon as the RBA started normalizing the cash rate the following month in May.
“The rapid pace of RBA tightening has had an almost immediate impact on credit demand and, by extension, house prices.”
The rapid pace at which domestic house prices are currently falling is not expected to change anytime soon as the RBA continues to raise the cash rate, the CBA added.
Data from CoreLogic has indicated that home prices nationwide fell 1.4 percent in July and are likely to decline 1.5 percent in August.
The drop would represent a 4 percent drop in house prices from their April 2022 peak. Sydney house prices are expected to fall just over 2 percent for the second month in a row, signaling a 7 percent drop from its peak in January.
Melbourne prices were expected to fall 1.3 per cent, marking a 5 per cent drop from their peak earlier this year.
In Brisbane, house prices look set to post a sizeable 1.7 per cent drop in August, and while prices in Adelaide and Perth have maintained momentum, they are also expected to decline.
“We expect prices to decline in those markets from here as higher interest rates further reduce demand for home credit, and in turn price expectations and earnings adjust lower. ”, the CBA said.
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