Australian house prices could fall 30 percent as rates rise

The latest home value results are sobering reading for anyone who has recently borrowed to buy a home.

Nationwide home values ​​fell 1.6 percent for the month, the fourth straight monthly decline. Losses were driven by Sydney (-2.3%), Brisbane (-1.9%) and Melbourne (-1.2%), and Perth (-0.2%) and Adelaide (-0.1%) also finally joined the correction. , CoreLogic data shows.

The quarterly rate of decline accelerated to 3.9% at the five-city aggregate level, driven by sharp declines in Sydney (-5.9%), Melbourne (-3.8%) and Brisbane (-2.5%). .

By contrast, Adelaide (1.6 percent) and Perth (0.4 percent) remained in positive territory; although the pace of growth is fading fast.

The quarterly decline in home values ​​is the steepest since 1983 at the aggregate level for five cities and in Sydney, while Melbourne’s quarterly decline was the fastest since February 2019 and Brisbane’s since 2008.

Home values ​​are now 4.2 per cent below their April peak at the five-city aggregate level, with Sydney down 7.4 per cent from the peak, Melbourne down 4.6 per cent and Brisbane 2.7 percent.

How Australia’s housing correction compares to history

The charts below plot the current housing corrections in Sydney, Melbourne, and the aggregate level of five cities (black lines) versus previous episodes, using the CoreLogic monthly hedonic index.

Sydney’s current 7.4% correction has a long way to go before reaching the depths of the 1982-83 crash (-17.4% over 11 months) or the 2017-19 correction (-14.9 % in 23 months). However, the rate of decline is the second fastest on record at this stage of the recession (seven months later), and the rate of decline also accelerated considerably during the last quarter.

Melbourne’s current 4.6% correction also has a long way to go before reaching the major crashes recorded in 2017-19 (11.1% over 19 months) and 1989-92 (9.8% over 21 months) . The current correction’s six-month rate of decline is also the fourth fastest on record.

Finally, although the current correction of 4.2% in four months at the aggregate level of five cities is nothing special compared to the corrections of 2017-19 (10.7% in 21 months) or 1982-83 (8.7 % in 10 months), is the fastest decline recorded at this stage of the cycle.

Australia faces its biggest house price correction on record

Ultimately, the depth of this housing correction will depend on how aggressively the Reserve Bank of Australia (RBA) raises interest rates, as higher mortgage rates reduce borrowing capacity and reduce demand for money. households.

Economists and the market universally anticipate that the RBA will raise the official cash rate (OCR) another 0.5 percent next week to 2.35 percent, marking the fifth consecutive increase.

From there, opinion is divided. CBA, AMP and NAB expect OCR to peak at 2.6%, while ANZ and Westpac forecast a peak of 3.25% in early 2023.

The bond market is even more aggressive, with a maximum OCR price of 3.80 percent by mid-2023.

How high will mortgages go?

Under the lower forecast from the CBA, AMP and NAB OCR, Australia’s average discount variable mortgage rate would rise to 5.95 per cent, up from 3.45 per cent in April 2022, immediately prior to the first rate increase in the RBA.

Higher OCR forecasts from ANZ/Westpac and the bond market would send the average discount variable mortgage rate to 6.70 percent and 7.15 percent, respectively.

The latest RBA Financial Stability Review estimated “that a 200 basis point increase in interest rates from current levels would reduce real house prices by around 15 per cent over a two-year period”.

Australia therefore faces a peak-to-trough decline in real house prices of between 20% and 30%, based on these OCR forecasts, or between 12% and 20% in nominal terms, assuming inflation remains high.

The more expensive markets of Sydney and Melbourne are likely to see larger declines than the national average, with the more affordable markets faring better.

Regardless, Australia faces the largest house price correction on record, the ultimate size of which depends on how aggressive the RBA is.

Leith van Onselen is Chief Economist at MB Fund and MB Super. Leith previously worked at the Australian Treasury, the Victorian Treasury and Goldman Sachs.

Read related topics:Reserve Bank

Be the first to comment

Leave a Reply

Your email address will not be published.