Fixed rates likely to slow down house price gains

House prices are expected to slow down by the first half of 2022 before diving into the red in 2023, with the rising fixed rates as one of the main drivers.

CommBank head of Australian Economics Gareth Aird said the housing market is now at the “twilight” of the booming phase that was fuelled by low mortgage rates.

“Near term indicators of momentum coupled with the recent move higher in fixed rate mortgages suggest that conditions will moderate from here,” Mr Aird said.

Lenders are currently following the fixed-rate hike trend, both for owner-occupiers and investors.

CommBank’s forecasts reveal a 22% gain in home prices by the end of the current year.

“From there we expect prices to continue to rise through the first half of 2022, but at a more modest pace,” Mr Aird said.

By late 2022, prices are likely to peak, hitting a value 7% higher than end-2021 levels.

“We then expect an orderly correction in dwelling prices of 10% in 2023,” Mr Aird said.

This decline, however, should be put into context.

“A decline in national dwelling prices of 10% in 2023 on our figuring simply take prices back to where they were in Q3 2021,” he said.

How interest rates influence price movements

Mr Aird said in the simplest terms, income and borrowing rates ultimately tell the price that someone is willing and able to pay for a home.

“As home prices move higher, affordability becomes stretched — that can be improved via a reduction in mortgage rates or higher income,” he said.

“But at some point, the tailwind of lower mortgage rates on prices wanes unless there are further cuts in interest rates.”

When prices are rising, interest rates become a headwind.

“That is the place we believe we are moving towards over the next two years given our expectation for the RBA to commence normalising the cash rate in late 2022,” Mr Aird said.

The prediction that house prices are to decline by 2023 comes off the back the expected gradual increase in cash rate, which is likely to hit 1.25% by the third quarter of the same year.

CommBank predicts the RBA will gradually increase the cash rate, taking it to 1.25% by the third quarter of 2023.

The RBA is expected to move the needle by November 2022, boosting the cash rate for the first time over two years by 15bps.

“The cash rate is forecast to lift because the economy will be at full employment and annual wages growth will have pushed to the desired level of 3%,” Mr Aird said.

“Stronger wages growth will provide a partial offset to rising interest rates on the property market.”

Interestingly, Mr Aird said the reopening of international borders will likely boost demand for inner-city apartments.

“As such, we expect house prices to decline by a little more than apartment prices over 2023,” he said.

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Photo by Julienne Alviar on Unsplash.