A 5.2 % fall is forecast over the year ahead
House prices are forecast to fall over the coming years, as downward pressure on migration, rising supply and higher interest rates constrain demand.
In a report on house price declines, industry research analysts at IBISWorld forecast Australian house prices to fall 5.2% in 2022-2023, and 7.2% in 2023-2024.
House prices surged 18.1% over 2021-2022 - the biggest annual increase since records began, IBISWorld said in the report. Higher demand for housing and low interest rates were cited as key drivers of the increase, the COVID-19 pandemic causing many homebuyers to shift from inner city suburbs to outer suburbs and regional towns.
Similarly, CoreLogic February Home Value Index figures showed house prices rose 20.6% over the year. This was down from what CoreLogic said was likely to be a peak annual growth rate of 22.4 % in January.
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IBISWorld forecasts showed average annual growth of 5.2% over the five years from 2021-2022 to 2026-2027.
IBISWorld senior industry analyst Matthew Reeves said homeowners and investors were likely to see weak house price performance over the medium term, and more monthly volatility over the next 12 months.
“Greater global economic uncertainty and the damage to investor confidence caused by the Russia-Ukraine conflict is expected to constrain demand, weakening housing prices,” Reeves said.
Following the reduction of the yearly permanent migration cap (160,000 in 2020-2021), IBISWorld expected migration rates to ease, “constraining demand and limiting growth” in house prices.
Fragile demand conditions were coupled with rising supply (the HomeBuilder scheme contributed to a 24% rise in dwelling commencements), and uncertainty created by the Russia-Ukraine conflict.
Weaker demand, low net migration and a greater supply of completed projects were forecast to drive a bigger house price decline in 2023 to 2024. Prices were expected to recover slightly in 2024-2025, but “not return to the heights of 2021-2022”.
Over the next five years (to 2025/2027), this translated to a 1.1 % annual average annual fall in residential house prices.
“The negative outlook for house prices has been driven by a wide range of factors … these include monetary policy, the effects of the COVID-19 pandemic, a loss of consumer and investor confidence as a result of the Russia-Ukraine conflict, and a hangover from escalating house prices in recent years,” Reeves said.
Interest rates, which fell to record-lows during the COVID-19 pandemic, are expected to rise.
Reeves said pressure from other central banks may prompt the RBA to raise the official cash rate in 2021-2022 – but certainly in 2022-2023.
“IBISWorld expects the cash rate to rise at an average annual rate of 0.27 percentage points to 1.45% in 2026-27. As the cash rate rises, banks will pass this on to consumers in the form of higher lending rates, weighing negatively on demand for housing,” Reeves said.
He said tighter lending standards, which mandated improved lending standards for lower income earners, were likely to add to pressures of rising mortgage rates.
“Interest rate rises come at a time of high levels of household debt. Borrowers are more susceptible to small changes in interest rates during high levels of household debt, and debt stress could trigger a decline in housing prices,” Reeves said.
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Executive chairman of non-bank lender Mortgage Ezy Peter James (pictured above) said there was currently a lot of uncertainty in the housing market. If the Russia-Ukraine conflict spilled over to other regions, he said it would start to look like “a perfect storm”.
Closer to home, the peak of rising property prices was fast becoming “a distant memory”, James said.
Among the reasons for slower growth were a high prospect of a change in government that had previously shown to be unfriendly to investors with its policy of reducing capital gains concessions and abolishing negative gearing, combined with the prospect of rapidly rising interest rates.
“Demand has reduced and already affordability is being stretched to the point that very little price increases have been evident over the past six months for houses changing hands on our portfolio of loans we manage,” James said.
Asked whether he anticipated a house price correction, James said over the last six months house prices had stabilised.
“Should interest rates increase by more than 1%, this will have a significant effect on demand and affordability that we believe a 10 to 20 % correction over the next 18 months could eventuate in most regions with regional areas most affected,” James said.
