Looming rate increases will push forward correction in dwelling values, bank says
Looming, rapid interest rate hikes by the Reserve Bank of Australia will throttle a rebound in consumer demand and spur an earlier, sharper correction in housing prices, Westpac predicts.
“Recent changes to Westpac’s interest rate and inflation forecasts have shifted the outlook for the consumer and dwelling prices in Australia,” Westpac chief economist Bill Evans told The Australian. “Our revised RBA view has the cash rate reaching 1.5% by year end and a peak of 2% by May 2023 … a significantly earlier and more compressed tightening than our forecasts in February, which had a first hike in August and a 1.75% peak in March 2024. The first-quarter CPI surge points to a higher near-term outlook for inflation.”
Evans said that this would “take some of the heat out of the ‘reopening rebound’ in consumer demand in 2022.”
The normalisation of activity in the wake of the COVID-19 pandemic, along with lingering effects of past policy stimulus, are still expected to spur some gains in consumer spending, The Australian reported. However, the bank is expecting annual growth of 6.2% in real terms, rather than its previous forecast of 8%. With other adjustments to business investment and housing, Westpac downgraded its prediction for GDP growth this year from 5.5% to 4.5%, and from 2.7% to 2.5% in 2023.
Accelerated interest rate rises will also bring forward the likely peak in dwelling prices, according to The Australian. Westpac now predicts no further gains in housing prices in the near term, with a “correction phase” to hit the market within months.
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Westpac now forecasts that house prices will fall 2% this year, another 8% next year, and 1% in 2024, The Australian reported. A peak-to-trough tumble of 14% from May this year to June 2024 would outstrip the 9.6% drop in 2017-18 and the post-Global Financial Crisis drop of 7.4%. It would be the largest drop since 1979, according to CoreLogic data.
However, Westpac said these are not valid comparisons with the corrections during high-inflation periods in the 70s, 80s and early 90s. In real terms, adjusted for inflation, the corrections in the early 1980s and early 1990s were deeper.
“While the size of the correction is roughly the same, it starts from a lower peak and comes through more quickly,” Evans said. “With robust inflation near term, dwelling prices will see no net change over the five years to 2024 in real, inflation-adjusted terms.”
CoreLogic research director Tim Lawless said that a rate hike “may trigger an earlier-than-expected decline in prices outside of Sydney and Melbourne.” However, Lawless said there was no expectation of a material rise in distressed listings due to the low unemployment rate, The Australian reported.
