New report predicts market will begin to improve in mid-2023
Housing price declines will bottom out in June 2023 with an average year-over-year drop of 15% across the capital cities, according to a new report from Deutsche Bank. The report predicts that the market will then begin to improve as an increase in wages dulls the effect of higher borrowing costs.
Housing affordability has worsened as a result of the Reserve Bank’s repeated interest rate hikes, which have pushed the cash rate from a record-low 0.1% to 2.85%. The rate hikes have so far caused a 22% cut in purchasing power for prospective home buyers, according to The Australian Financial Review.
Deutsche Bank’s newly created housing affordability index shows that a buyer making average weekly earnings of $1,769 with a 20% deposit could have afforded to spend $508,000 to purchase a home in April. By November, that figure had tumbled to $398,000.
Affordability will continue to suffer into 2023 until wage rises become widespread enough to blunt the effect of spiking interest rates, Deutsche Bank chief economist Phil Odonaghoe told AFR.
“We’ve had this slap in the face from interest rates,” Odonaghoe said. “The good news is wage increases are going to pick up and take off some of the pressure.”
The bank’s forecast assumes a further 50-basis-point hike in the RBA’s benchmark rate to a maximum of 3.35%, and as an average did not reflect the poorer affordability seen in Sydney and Melbourne or the greater affordability seen in smaller cities, AFR reported.
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Reports last week showed that Australia’s private-sector pay rises hit 4.3% in the September quarter – the fastest pace in a decade – and overall wage growth rose 1%. That growth will continue into 2023 and eventually offset the effect of further rate rises, Odonaghoe told AFR.
“Incomes are going to be rising a lot next year,” he said. “Interest rates are going up, but at the same time … things are going to improve. Houses start to get less unaffordable.”
He predicted that the central bank was unlikely to start cutting rates again before mid-2024, which could delay a recovery in house price growth.
