Australia's housing boom to wind down as mortgage rates rise

Rampant rises in house prices expected to grind almost to a halt this year

Australia's housing boom to wind down as mortgage rates rise


By Mina Martin

Australian house price growth surges will grind almost to a halt this year, and an 8% drop is anticipated in 2023 as cost-of-living crisis gets worse and mortgage rates increase, according to a Reuters poll of property market analysts.

House prices have nearly doubled since the Global Financial Crisis due to cheap loans based on near-zero interest rates, turning Australia into one of the world’s least affordable places to buy property.

Prices spiked over 20% last year – the biggest annual rise since 1989 – making it more difficult for first-time buyers to get onto the property ladder.

The median forecast in the May 11-25 poll of 11 analysts showed that pace will slow to 1% this year, down sharply from 6.7% forecast in a February poll, Reuters reported.

The analysts predicted prices to drop 8% next year, up from the 5% expected in the previous survey.

“The risk of a crash cannot be ignored, given the high level of household debt and that it’s been more than 11 years since the last rate hike,” said Shane Oliver, chief economist at AMP, who expected house prices to decline 10-15% into 2024.

Earlier this month, the Reserve Bank lifted its cash rate for the first time since November 2010, by 25 basis points to 0.35%, and flagged more hikes to come.

A sudden increase in borrowing costs could significantly impact housing activity, in a country where about 6% of employment was closely tied to the residential construction sector, eventually leading to slower economic growth, Reuters said.

“A steep increase in mortgage rates over the coming year will weigh heavily on house prices,” Adelaide Timbrell, senior economist at ANZ, told the news agency.

It will also be a challenge for heavily indebted households. Australia currently has a record outstanding mortgage debt of $2 trillion.

To make housing more affordable for first-time buyers, a substantial decline in prices was in order.

“A very large correction in prices would be needed to enable ‘affordable’ housing, particularly in Sydney and Melbourne, though the wage outlook is key to how much of a correction would be needed,” Timbrell told Reuters.

Wages, though, were still lagging, rising by 2.4% over the year to March, according to Australian Bureau of Statistics, which was half the pace of inflation.

According to both ANZ and Knight Frank, average prices would have to fall 40% – roughly the amount US house prices plunged during the Global Financial Crisis – to make Australian housing affordable.

House prices in Sydney and Melbourne were predicted to fall 2.5-3% this year and 9% in 2023. In Brisbane, Adelaide and Perth, prices were tipped to rise 2.0-6.5% this year but decline 4.5% in 2023, Reuters reported.         

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