Will the real estate market finally collapse?
Low affordability and rising interest rates are expected to drive home prices down 10-15% by 2024, AMP’s Shane Oliver said in his latest episode of Oliver’s Insights.
According to Dr. Oliver, national average house prices are expected to peak around the middle of the year and then enter a cyclical downturn.
“Following 22% growth in national average house prices last year, average house price growth this year is expected to be around 1% and we expect average prices to decline 5-10% in 2023” , said Dr. Oliver.
“Top to bottom, the fall in prices through 2024 is expected to be around 10-15%, bringing average prices back to March/April levels of last year,” he continued.
The existing divergence between the capitals should however be maintained.
“Sydney and Melbourne appear to have already peaked and should see falls at the upper end of the range. But Brisbane, Adelaide, Perth and Darwin and regional areas are less constrained by low accessibility and are likely to see shallower falls,” Dr Oliver said.
As for the main drivers of the current recession, Dr Oliver believes it will be a combination of low affordability, rising fixed mortgage rates, impending RBA hikes, high inflation and a decline in buyer confidence. Higher supply in Sydney and Melbourne as sellers seek to take advantage of high prices and strong construction after two years of zero immigration are also likely to play a role.
“Over the past 25 years, average house prices in the capital have increased by 358%, compared to a 113% increase in wages. Thus, prices rose more than three times as much as wages. Since their most recent low in September 2020, prices have risen 20% against only 3.7% increase in wages. It pushed more home buyers out of the market,” Dr Oliver explained.
He forecasts an RBA rate hike in June, with variable mortgage rates expected to rise nearly 1% by the end of the year and 1.5% by the middle of next year.
“Rough estimates suggest that a 1.5-2% rise in mortgage rates would reduce homebuyers’ borrowing power and ability to afford a home by 10-15%,” Dr. Oliver predicted.
According to recent modeling by the RBA, a 2% rise in interest rates would cause real house prices to fall by around 15% over a two-year period.
Will prices collapse?
According to Dr. Oliver, no, but only because he considers a “crash” to be a fall of around 25%.
“Our assessment is that while a crash is possible, it’s unlikely unless we see very aggressive rate hikes – say take the cash rate to 4 or 5% – or much higher unemployment, leading to a sharp rise in defaults and forced sales of properties,” he explained.
But Dr Oliver thinks Australia could be nearing the end of its 25-year property price boom.
He explained that while the ongoing real estate downturn could be just another cyclical downturn, “the 25-year-old bull market is likely to come under pressure in the years to come.”
Regarding the federal election in May, Dr Oliver predicted that a change of government would not impact the outlook due to relatively minor policy differences over ownership between Labor and the coalition.
“For interest, using CoreLogic data since 1980, property prices in the capital have risen by 6.6% per year under Coalition governments and 5.2% per year under Labour. But the dominant influence has been the business cycle and interest rates, as housing policies have not been particularly different.