House prices will end the year “roughly flat” before dropping 11 per cent or more in the biggest markets of Sydney and Melbourne next year, NAB’s latest forecast says.
The bank’s revised forecast in its quarterly residential survey, comes just two days after Reserve Bank governor Philip Lowe conceded interest rates could start rising later this year, a possibility economists already anticipated.
The markets are pricing in as many as four increases this year while borrowers are already signing up to fixed-rate mortgages at a higher cost.
“In terms of forecasts, we have brought forward the timing of the correction we expect in house prices to late 2022 as affordability constraints begin to bite and rising mortgage rates place downward pressure on prices,” NAB chief economist Alan Oster wrote in the survey released on Friday.
“This would offset gains seen in early 2022, so that overall, prices end the year roughly flat. We see this trend continuing through 2023, ending the year about 10 per cent lower.
“We expect this pattern to be evident across the capital cities, though for larger declines to occur in Sydney and Melbourne, while Brisbane and Adelaide see less significant declines.
“However, we do not see these declines as disorderly, with the labour market remaining strong, wages growth picking up and rates still relatively low – though steadily increasing.”
NAB expects house prices in Sydney to end 1.9 per cent higher this year, with Melbourne posting a mere 1.2 per cent gain. Brisbane and Hobart have the best prospects, with forecast gains above 4 per cent this year.
House prices across all state capitals will fall in 2023 on NAB’s view, with Sydney and Melbourne leading the charge lower with drops of 11.4 per cent in both cities.
“With our view on rate hikes coming forward, we now expect the turning point in property prices to occur in the second half of 2022,” Mr Oster wrote. “We see this as a relatively orderly decline … it is important to remember this correction comes after a very sharp run-up in prices over the last year.”
The credit-fuelled housing boom added nearly $1000 a day to Sydney house prices, which finished the year 29.6 per cent higher. Nationally prices rose 24.5 per cent over 2021.
But that incredible surge was already showing signs of easing before Dr Lowe addressed the National Press Club on Wednesday, when he acknowledged interest rates may rise this year.
“If things go well and the economy performs stronger, there are clearly scenarios where we’d increase rates later this year,” Dr Lowe said.
Signs of deceleration were evident in Core Logic’s January house price data this week, showing house prices nationwide rose 1.1 per cent in January.
But the tempo in the biggest markets is winding back more rapidly, with Sydney adding just 0.6 per cent to home values and Melbourne, increasing by 0.2 per cent.
Although house prices typically lag changes in interest rates, the large amounts of debt needed to secure homes could make prices more sensitive to rising credit costs this time around.
The Commonwealth Bank of Australia has also begun tempering its expectations for the house price growth, noting the moderation in monthly gains. CBA has previously forecast a lift in prices of 7 per cent this year, before a fall of 10 per cent in 2023.
