Big bank predicts a continuing boom, then bust, and you'll be surprised to see how soon
House prices will spike nationally by 18% this year, according to a forecast by Westpac – including a predicted 22% increase in Sydney despite the lockdown. Westpac predicted the spike would set the stage for stricter lending criteria early next year.
Prices are predicted to rise a further 5% next year before falling 5% in 2023, driven by higher interest rates, low affordability and the tightening of macroprudential policies, according to a report by The Australian Financial Review.
“Deteriorating affordability is likely to weigh on owner-occupier demand, and a tightening in macroprudential policy settings will restrain the supply of credit,” said Westpac chief economist Bill Evans. “We expect housing credit growth to exceed 7% by the first half of 2022, triggering a likely policy intervention. The precise response will depend on the composition of lending over the next year.”
Previous macroprudential measures were targeted at investors rather than owner-occupiers. New loan commitments to investors nearly doubled between June 2020 and May of this year, according to data from the Australian Bureau of Statistics.
However, while the total value of investor commitments -- $91.1 billion in May – is close to highs seen in 2015, investors’ overall percentage of loans is still below the 45% level hit during the last housing boom, AFR reported.
Regulatory steps to cool the market could target higher loan-to-value ratios, higher household debt-to-income ratios, or the issuing of interest-only loans, according to AFR. If gains are driven by a more general spike in credit growth, regulators may place a limit on aggregate lending for investors as was done in 2015, Westpac predicted.
Brisbane and Hobard house prices are predicted to rise 18% this year, followed by Melbourne (16%), Adelaide (14%), and Perth (12%), further stretching affordability.
“The upswing that emerged at the start of this year has continued to run ahead of expectations, with markets carrying strong momentum into the second half,” Evans told AFR. “Prices nationally rose 12.2% over the first six months, an extraordinary 25.6% pace in annualized terms.”
Westpac was the first major bank to predict that cash-rate hikes would come before the Reserve Bank of Australia’s current target of 2024, with Evans forecasting the first increase above the current rate of 0.1% in March 2023. Most economists now believe the central bank will begin to hike rates over 2023 and 2024 to a rate of about 1.25%, AFR reported. Westpac predicted that raising rates any higher would place “significant stress” on household finances.