House prices forecast to tumble

As more rate hikes loom, house prices are expected to drop another 15% over the next 18 months

House prices forecast to tumble

The housing market is expected to tumble sharply next year as looming interest rate hikes cast a shadow.

Experts predict a 15% drop in house prices over the next 18 months, after prices dropped last month for the first time in nearly two years, according to a report by The Australian.

The national house price average fell by 0.11% last month, driven by drops of 0.29% in Sydney and 0.27% in Melbourne. While May was the fourth consecutive month in which Sydney posted falling prices, it was the first month in which the national average fell, The Australian reported.

Shane Oliver, chief economist at AMP, told the publication that people being priced out of the market was a significant driver of the fall, with prices having skyrocketed an unsustainable 20% since the onset of the COVID-19 pandemic while wage growth stayed flat at around 2.3%.

AMP also said the drop was spurred by high inflation, rising mortgage rates, changing consumer spending, a fall in consumer confidence and the beginning of monetary tightening by the RBA.

“The deterioration in affordability has priced many out of the market,” Oliver told The Australian. “But the main driver of the downturn is the upswing in interest rates.”

Analysts at Morgan Stanley said last month’s cash rate hike has already impacted the market.

“It is no coincidence that the first month of declining national prices coincided with the first rate hike since 2010,” Morgan Stanley said. “While sentiment has already been deteriorating for several months, rate hikes have a much more direct effect on actual and expected serviceability costs, as well as credit availability.”

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Morgan Stanley said it expected the RBA to hike rates at most meetings this year, raising the cash rate to 1.75% by December.

“The tightening impact of this on housing means we continue to see national prices declining 5% this year and 10% next year, for one of the largest nominal declines on record,” Morgan Stanley said.

Oliver told The Australian that house prices have likely peaked.

“We continue to expect a peak-to-trough fall of around 10% to 15%,” he said.

However, AMP’s forecasts for the rest of 2022 aren’t quite as dire as Morgan Stanley’s.

“After 22% growth in national average home prices last year, home prices this year are now expected to fall 2%,” AMP said.

Oliver said that it was unlikely that the drop in prices would severely impact the market or the wider economy.

“Seen in the context of the huge 29%-plus surge in prices since their 2020 low, this will just take average prices back to the levels around March last year, so a big rise in negative equity is unlikely,” he told The Australian.

However, Oliver warned that homeowners might be less prepared for rising rates than in previous cycles.

“Household debt-to-income and house-price-to-income ratios are way higher than they were when the last rate hiking cycle started in 2009,” he said.