A top economist has predicted that Australian house prices will fall 25 percent as borrowers face the strongest rate of interest rate hikes in nearly three decades.
With inflation rising at its fastest rate in 32 years, experts widely expect the Reserve Bank of Australia to continue raising spot interest rates into 2022 and possibly 2023.
Jo Masters, the chief economist at Barrenjoey, predicts a 25 percent drop in average house prices in Sydney as a severe tightening of the RBA’s monetary policy has sparked a recession.
“Our modeling suggests that if the Reserve Bank follows market prices, we will have an economy in recession and we will see house prices drop significantly,” she told The Australian Financial Review Property Summit in Sydney on Monday.
Sydney’s average house price has fallen 7.3 percent since the start of the year to $1.3 million in August, CoreLogic data shows, making it Australia’s most interest-rate sensitive market.
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Australian house prices are expected to fall 25 percent as borrowers face the strongest rate of rate hikes in nearly three decades (Pictured is an auction in Melbourne)
Jo Masters (pictured), Barrenjoey’s chief economist, predicts a 25 percent drop in Sydney’s average house prices as a severe tightening of the Reserve Bank’s monetary policy has sparked a recession
As late as February, before prices fell, Sydney had a median home price of $1.41 million, so a 25 percent dip, from its peak, would wipe out $352,532 of a typical suburban home, bringing it back to $1,058 million.
Ms. Masters’ forecast was based on a cash interest rate hike of another 0.5 percentage point to its nine-year high of 2.85 percent, up from its current seven-year high of 2.35 percent – after the strongest rate of increase since 1994.
She argued that this would mainly impact the Sydney housing market with a “very leveraged effect”, where the average house price is 11.3 times an average full-time salary of $92,000, even with a 20 percent mortgage deposit.
The banking regulator considers a debt-to-income ratio of six or more to be risky.
Jonathan Kearns, the Reserve Bank’s domestic markets chief, told the AFR summit that a two percent rise in RBA interest rates would lead to a 15 percent drop in real estate prices.
He noted that the RBA’s April Financial Stability Review report calculated that prices would fall at this rate if cash interest rates rose 200 basis points over two years.
“While this 15 percent drop was widely reported as a prediction for home prices, it wasn’t really a prediction of how much home prices would change,” said Dr. kearns.
‘It was rather an estimate of the interest rate sensitivity of house prices, assuming that all other costs and benefits for housing do not change with interest.’
Since May, the Reserve Bank has raised interest rates by 2.25 percentage points, the most sweeping monetary policy tightening since 1994, pushing the spot rate to a seven-year high of 2.35 percent.
dr. Kearns said five consecutive rate hikes since May — ending the era of record-low cash interest rates of 0.1 percent — had done more to slow the real estate market than the tougher banking regulator rules that came into effect late last year.
“The cash interest rate hike since May has been 225 basis points, so this has had a much greater impact on loan caps than APRA’s requirement,” he said.
“Given that this 225 basis point increase in the cash interest rate has been fully passed on in the mortgage rate, the maximum amount of borrowers will be reduced by about 20 percent.
Jonathan Kearns, the Reserve Bank’s head of domestic markets, said a two percent increase in RBA interest rates would lead to a 15 percent drop in real estate prices.
“So in general we know that higher interest rates tend to depress residential and commercial real estate prices, but there is significant uncertainty about the magnitude and even the timing.”
The Commonwealth Bank, Australia’s largest mortgage lender, released new data on Monday showing that lending to new homes fell 13 percent in August compared to a year earlier.
Since November, the Australian Prudential Regulation Authority has required borrowers to model a borrower’s ability to cope with a three percentage point rise in variable mortgage rates, from 2.5 percentage points previously.
Inflation rose 6.1 percent in the year to June, a level well above the RBA’s 2 to 3 percent target.
The Reserve Bank and Treasury both expect headline inflation to reach 7.75 percent by 2022, which would be the highest since 1990.
Covid lockdowns in March 2020 led to the first technical recession since 1991, prompting the RBA to cut the cash interest rate to a record low of 0.1 percent in November 2020.