Australia house prices forecast to slump 16% from peak

AUSTRALIAN housing prices that are on a steep decline will likely fall further next year, according to a Reuters poll of analysts who forecast a peak-to-trough slump of 16 per cent, more than double the correction during the 2008 financial crisis.

Near-zero interest rates and a dearth of housing supply had pushed home values across Australia up 25 per cent during the pandemic, increasing homeowners’ wealth, but that has also kept many first-time buyers off the property ladder.

However, the Reserve Bank of Australia (RBA) has lifted interest rates by 275 basis points this year to a nine-year high of 2.85 per cent; it is expected to add another quarter-point in December. Markets are pricing it to reach 4.00 per cent by end-June.

That has hit home prices, pressuring the RBA to downshift to smaller rate hikes, as it is worried that aggressive tightening would sharply curtail household spending in an economy where a lot of wealth is tied up in housing.

Australian house prices have nearly doubled since the financial crisis, but that boom has led to a build-up of household debt that could become a risk to financial stability.

Although average house prices have fallen 6.5 per cent since a peak late last year, with losses spreading to every state capital, they are still well above pre-pandemic levels.

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“We expect a peak-to-trough housing fall of 15 to 20 per cent, and this should be considered an orderly descent,” said Adelaide Timbrell, senior economist at ANZ.

“Strengthening population growth driven by immigration, as well as favourable labour market conditions, will be protective factors against a more rapid decrease in prices or a crash.”

Estimates for a peak-to-trough correction were in a wide 13 per cent to 28 per cent range in the poll done between Nov 9 and 24, highlighting the uncertainty.

On a calendar-year basis, the poll showed average home prices falling 7.3 per cent this year and 9.0 per cent in 2023. The estimate for next year was unchanged from a September poll.

While lower house prices would help improve affordability, it would be a bitter pill to swallow for recent homeowners, watching their capital decline and facing higher repayments as interest rates rise.

“It is crystal clear that the RBA is now focused on developments in the housing market. And their tightening cycle from here will determine how much further home prices will fall,” said Gareth Aird, head of Australian economics at CBA.

AMP, ANZ, Knight Frank and Macquarie said average house prices would have to fall by between 25 per cent and 45 per cent to make Australian housing affordable.

“A substantial reversal would be required to make homes somewhat affordable,” ANZ’s Timbrell added.

Property prices in Sydney – the world’s second-most expensive housing market after Hong Kong – and Melbourne were forecast to fall by between 6.0 per cent and 6.5 per cent next year after having declined by 12.0 per cent and 8.5 per cent this year, respectively.

In Brisbane, Adelaide and Perth, they were expected to fall 7.0 per cent, 6.5 per cent and 5.0 per cent, respectively, next year. REUTERS