What is the Major Banks Outlook on Property Prices?

Whilst more sellers are now coming to market there is no doubt that the vast majority of would-be sellers are still waiting to list their home in the belief that prices will still continue to rise for some time, is this you ?

With this in mind, two excellent articles have come to light last week discussing both the major banks outlook on property prices and also the historical effect that rising interest rates have on property values.

The articles are featured in our report in the week and both come from the Australian Financial Review newspaper. Both articles are below

House prices to fall 14 per cent: Westpac

House prices will fall 14 per cent over 2023 and 2024 as strong inflation forces the Reserve Bank of Australia to start lifting interest rates from August this year, according to Westpac.After notching up 22 per cent growth last year, spurred by the record low 0.1 per cent cash rate, national house prices will eke out just 2 per cent growth in 2022 as early gains are offset towards the end of the year.

“Prices are then forecast to fall 7 per cent in 2023 and a further 5 per cent in 2024, stabilising towards the end of that year,” Westpac’s Bill Evans said.“In January, we moved to the view the RBA would begin its tightening cycle earlier and hike rates further, the cash rate forecast to begin rising in August 2022 to a peak of 1.75 per cent in March 2024.“The shift brings forward the timing of an anticipated correction phase for housing markets and means it will extend into 2024.”

Westpac’s chief economist, along with Commonwealth Bank head of Australian economics Gareth Aird, AMP’s chief economist Shane Oliver and Deutsche Bank’s Phil O’Donoghue are all tipping rate rises from August.Following stronger than expected inflation data for the December quarter, ANZ brought forward its tip for when rates rises will begin in September this year, while NAB is forecasting the first hike in November.

‘The sector is highly sensitive’

Headline inflation was 3.5 per cent in the year to December 31 while underlying inflation – the RBA’s preferred measure – was 2.6 per cent, solidly within the central bank’s 2 per cent to 3 per cent target band.“Housing will be ‘collateral’ damage in the RBA’s efforts to keep inflation on target over the medium term,” Mr Evans said. “The sector is highly sensitive to interest rate changes.“With affordability already stretched in many markets, rate rises will have a direct impact on the borrowing capacity of buyers and their ability and willingness to sustain high prices.”National Australia Bank earlier this year predicted house prices would fall by 11 per cent in Sydney and Melbourne in 2023, while AMP Capital has tipped a fall of 10 per cent over the same period.But RBA governor Philip Lowe on Friday affirmed his willingness to be patient before increasing the official cash rate, in contrast to money market traders pricing in five RBA interest rate rises this year.That might give highly indebted households more time to plan. Though the governor also said there were plausible scenarios where the strength of the economy meant the bank lifted rates this year.

But regardless of when the next hiking cycle starts, Dr Lowe said interest rates would eventually rise over the coming years to at least 2.5 per cent, and probably higher if productivity growth and real wages rose healthily.Economists and the RBA is grappling with how high the so-called “neutral” cash – the point at which monetary policy is neither contactionary nor expansive – rate is, with implications for both borrowers and savers.

How are interest rates and property prices related?

Rising interest rates have historically led to weaker home values, potentially setting the stage for falling prices within the year.

Analysis by CoreLogic found that interest rates and the national property values had a significant inverse correlation.

“When the cash rate rises, housing values could experience some downward pressure,” explained CoreLogic’s head of research Eliza Owen and research director Tim Lawless.

Over the past 20 years, an inverse correlation of 84.7 per cent was found between the cash rate and the national CoreLogic Home Value index.

“Lagging the cash rate by up to a year increases the strength of the correlation, which suggests it takes some time for movements in the cash rate to have their maximum effect on the property market,” CoreLogic said.

“Consecutive increases or reductions in the cash rate will also play a role in the correlation becoming stronger over time.”

The Reserve Bank has signalled that the first rate rise will occur in 2023, while major banks, including Commonwealth Bank and Westpac, are tipping a rise later this year.

Despite the strong connection, CoreLogic noted that a range of different factors influencing the housing market meant interest rates and property prices were not always correlated.

“For example, the introduction of macroprudential credit policies in December 2014, and September 2017, resulted in some temporary downward pressure on housing values,” CoreLogic said.

“These became more significant as tighter credit conditions (associated with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry) flowed through to less credit availability and softer housing outcomes.”

CoreLogic said currently elevated levels of household debt would likely make households more sensitive to the cost of debt.

“RBA data to September 2021 showed the ratio of housing debt to household income reached a record high of 140.5 per cent. With this in mind, households are likely to be more sensitive to movements in the cost of debt than they have been in the past,” the firm said.

AMP Capital chief economist Shane Oliver suggested that higher interest rates would contribute to the slowdown in the property market and has predicted prices will peak later this year.

“The Australian property market is highly sensitive to the monetary cycle as a result of very high price and debt to income ratios,” he said.

In addition to the impact of macroprudential tightening during the past decade, Dr Oliver pointed out that a series of rate hikes in 2009-10 had also been followed by a period of weaker property prices.

“Dwelling price growth has already started to slow and we expect the combination of worsening affordability along with rising fixed rates and then rising variable rates later this year to see home prices peak in the September quarter and fall 5 to 10 per cent in 2023,” he said.