NAB forecasts $300k house price drops as Reserve Bank of Australia warns of loan defaults

The National Australia Bank predicts a double-digit drop in typical house prices to $300,000 in Sydney and over $200,000 in Melbourne by the end of 2023.

The NAB’s gloomy forecast came as the Reserve Bank admitted that the recent wave of rate hikes would cause a “small” group of borrowers to default on their mortgages.

The RBA hit borrowers this week with a rate hike for the sixth straight month, pushing it to a nine-year high of 2.6 percent, and inflation is expected to quickly reach levels last recorded in 1990. seen.

Rising interest rates can exacerbate mortgage defaults and arrears by slowing the economy, leading to higher unemployment and lower wages.

A sharp drop in home prices would also cause borrowers to owe more than their home is worth – a situation known as negative equity.

In Sydney, where borrowers are particularly sensitive to interest rate hikes, NAB forecasts a 22.3 percent decline over two years from $289,945.

NAB, Australia’s largest corporate lender, forecasts a 12.9 percent decline in 2022, followed by a 9.4 percent decline in 2023.

Sydney’s average house price was $1,374,970 in December last year, meaning its value would fall by $177,371 in 2022, followed by another $112,574 next year, according to NAB’s forecasts.

Rate hikes are already biting, with Sydney’s average house price falling seven percent in the three months to September to $1,283,502, CoreLogic data showed.

In Melbourne, NAB forecast a 23.2 percent drop over two years, or a drop of $218,715.

NAB forecast a 9.1 percent decline in 2022, followed by a 14.1 percent decline in 2023.

With Melbourne’s median home price at $997,928 in December, this would cause a drop of $90,811 in 2022, followed by another drop of $127,903 in 2023.

Melbourne’s median home price fell 4.2 percent to $937,131 in the three months to September.

That latest 0.25 percentage point increase means that a borrower with an average $600,000 variable-rate loan will see their monthly repayments increase by $89 to $3,055.

In Sydney and Melbourne, where houses tend to be much more expensive, borrowers are particularly sensitive to interest rate hikes, with 95 percent of borrowers in some zip codes experiencing mortgage stress and barely able to pay their bills.

The RBA issued a new warning about mortgage defaults in its latest Financial Stability Review Friday.

Borrowers are considered to be in default on their loan when they are 90 days or more behind on their repayments.

“A small group of borrowers in Australia are particularly vulnerable to repayment problems due to rising interest rates and pressure on the cost of living,” it said.

“Many of these households have low liquidity buffers, low incomes and high debt relative to their income.”

A slowing economy also dents after tax revenues, making it even more difficult for borrowers to pay off their loans.

A large drop in house prices resulting in negative equity for households, in addition to further shocks to disposable income, would increase the risk that some borrowers will default on their loan obligations, the RBA said.

The Reserve Bank also warned of a higher default rate when borrowers are 30 days or more behind on their mortgage payments.

“A small proportion of borrowers with less savings and high debt are vulnerable to payment difficulties,” the report said.

“As a result, home loan arrears are likely to rise from current very low levels in the coming period.”

Sydney’s borrowers typically have a $1 million loan just to buy a mid-market home with a 20 percent down payment.

That’s 11 times an average full-time salary of $92,030, meaning only a working couple or a very high-income earner can afford a mortgage.

The Australian Prudential Regulation Authority, the banking regulator, considers a debt-to-income ratio of six or more to be dangerous.

Digital Finance Analytics has revealed the zip codes where 95 percent of borrowers face mortgage stress, where they don’t have enough cash flow to pay their bills and living expenses after a monthly payment.

These hot spots included the Campbelltown area in far south-west Sydney, Berwick in south-east Melbourne and Samson in south Perth in September, before the RBA’s latest rate hike.

NAB chief economist Alan Oster said the downturn is now spreading across Australia’s two largest cities.

“To date, Sydney and Melbourne have led the declines, but prices in other capitals now appear to have peaked as well – and the decline in Brisbane has accelerated,” he said.

Brisbane’s median home price fell 5.1 percent in the three months to September to $841,923.

NAB expects a small decline of 0.8 percent in 2022, followed by a 9.4 percent decline in 2023.

As a result, Brisbane’s average home price would fall $6,263 this year and $73,010 next year, causing a decline of 10.2 percent or $79,274 over two years from the December base of $782,967.

Hobart’s average home price has fallen 4.3 percent in three months to $761,368.

NAB expects a 23 percent decline over two years to $583,241.

That’s based on a 6.4 percent drop in 2022 and a 16.6 percent drop in 2023 that would wipe out $116,088.

The Reserve Bank noted that an unemployment rate of just 3.5 percent did not translate into strong wage growth.

“Despite a strong labor market, income growth has failed to keep up with inflation in Australia, leaving households with less capacity to service their debt,” the report said.

Australian inflation of 7 percent in July was the highest since 1990.

Though it fell to 6.8 percent in August, it was more than double the RBA’s 2 to 3 percent target as fruit and vegetable prices rose 18.6 percent while gasoline prices rose 15 percent.

Wages rose just 2.6 percent in the year to June, meaning most workers are dealing with a cut in real wages adjusted for inflation.

The RBA expects inflation to hit a new 32-year high of 7.75 percent in 2022.

A global economic slowdown could also lead to an economic slowdown in Australia, which the Reserve Bank was particularly concerned about.

Debt service challenges will intensify if economic conditions, especially unemployment levels, turn out to be worse than expected and house prices fall sharply,” it said.

The latest RBA raise is far from the last, with Westpac now forecasting a 3.6 percent cash interest rate for February next year, while ANZ hits that level in May 2023.

NAB predicts a cash interest rate of 3.1 percent.