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Australian house prices could fall as much as 44 percent if the Reserve Bank continues to raise interest rates to tackle its worst inflation in more than three decades, new models show.
Economic research firm Digital Finance Analytics has modeled the best and worst real estate price scenarios as inflation in Australia rises to its highest level in 32 years.
In the projected worst-case scenario, shared with Daily Mail Australia, house prices could fall by 13.2 percent by 2023, fall by 28.1 percent by 2024 and fall by 44.3 percent by 2025.
Should that worst-case scenario occur, Sydney’s median home price would have fallen from its peak of $1,417 million in 2022 to just $789,247 — down from $627,753 in just three years.
Melbourne’s median home price is said to fall by $443,410 to a 10-year low of just $557,516, after hitting $1,001 million earlier this year.
Australian house prices could fall as much as 44 percent if the Reserve Bank continues to raise interest rates to tackle its worst inflation in more than three decades, new models show. Digital Finance Analytics has modeled the best and worst real estate price scenarios, with Australian inflation now at its highest level in 32 years
A sharp fall in house prices would cause recent borrowers to plunge into negative equity, where they owed more than their home was worth.
Higher interest rates would also make it harder for tenants to enter the real estate market, even as prices fall.
Without capital appreciation, real estate investors would have little incentive to buy a home to rent out.
This means that there is little relief in sight for tenants if vacancy rates remain very tight, especially for houses.
Martin North, director of Digital Finance Analytics, said a house price drop of 44.3 percent over three years was possible if interest rate hikes didn’t bring inflation down.
“There is also a worst-case scenario that speaks of a bigger drop if interest rates rise, however high they are, and if inflation is not brought under control,” he told the Daily Mail Australia.
‘There is a good chance that we will see real estate prices fall further.’
His base case – or most likely forecast – is that Australian house prices will fall 17.9 percent in two years as borrowers struggle with rising variable mortgage rates.
In the worst-case scenario, house prices could fall by 44.3 percent by 2025, by 28.1 percent by 2024 and by 13.2 percent by 2023. Should that worst-case scenario materialize, Sydney’s median home price (homes in Oran Park pictured) would fall by $627,713 to just $789,247 — a level last seen in 2013.
“It will probably be significant for the next 12 months and then bounce around the bottom,” he said.
Digital Finance Analytics director Martin North, a business analyst, said that while a 28.1 percent drop in home prices over two years was more likely, a 44.3 percent drop over three years was still possible if rate hikes didn’t keep inflation down. lower
“Many households will struggle to keep their heads above water.”
The best-case scenario is a three percent drop in 2024 if interest rates remain where they were, which Mr North said was unlikely given high inflation.
Sydney and Melbourne, where homes are much less affordable, were expected to experience a recession earlier than Brisbane or Adelaide.
“Sydney, Melbourne are in the lead but Brisbane is also on the move,” said Mr North.
Since the start of the year, Sydney’s average house price has fallen 7.3 percent, compared to Melbourne’s 5.1 percent, CoreLogic data shows.
However, Brisbane has so far seen a 5.9 percent increase in 2022, despite a 2.1 percent drop in August. However, the median home price of $864,149 last month was still more affordable than Sydney’s $1,303 million and Melbourne’s $948,879.
Melbourne’s median home price is set to fall $443,410 to a decade-low of just $557,516 after hitting $1,001 million earlier this year
Adelaide’s average price is up 11.4 percent this year to $707,364, despite falling 0.2 percent last month in the face of large interest rate hikes.
Unless you absolutely must buy, I think you’ll sit on the sidelines
Martin North, Digital Finance Analytics
Mr North, who has worked in banking in the UK and Australia, expects the RBA to raise cash interest rates to an 11-year high of 3.5 percent by 2023, compared to an existing seven-year high. of 2.35 percent.
An increase to that level would mean that interest rates would have risen by 3.4 percentage points in less than a year, from a record low of 0.1 percent.
Lenders must assess a borrower’s ability to cope with a 3 percentage point increase in variable mortgage rates.
That means that raising the cash interest rate to 3.5 percent, as Mr North predicts, would limit banks’ borrowing capacity even more severely and accelerate the decline in house prices.
Westpac forecasts a slightly higher spot interest rate of 3.6 percent by February next year, a forecast in line with the Paris-based OECD.
“With credit tightening, with less credit availability, prices are falling, that’s what I’m seeing in the end,” said Mr North.
“A typical borrower, if you go to the bank today compared to February, your loan you would get would be somewhere 20 to 25 percent lower.
“And if rates rise, they will continue to fall.”
Borrowers since May have experienced five consecutive monthly rate hikes, the most severe since 1994.
Inflation in the year to July rose by 7 percent, the fastest increase since 1990, the Australian Bureau of Statistics announced Thursday.
The consumer price index moderated slightly to 6.8 percent in August, but housing construction costs rose 20.7 percent during the year.
A sharp fall in house prices would cause recent borrowers to plunge into negative equity, where they owed more than their home was worth (pictured is an auction in Melbourne)
Economists and the futures market expect the RBA to raise interest rates by another 0.5 percentage points on Oct. 4, to a nine-year high of 2.85 percent.
The RBA and Treasury expect headline inflation to hit a new 32-year high of 7.75 percent by the end of 2022, but Mr North feared it could accelerate to 8.5 percent by 2023 as interest rate hikes reach so far will not have a negative impact on retail spending. levels.
Mr North said “supply chain disruptions, the cost of energy” would keep inflation well above the RBA’s 2 to 3 percent target.
He said now was not the time to buy a home, as the RBA was expected to continue raising interest rates.
“Unless you absolutely have to buy, I think you sit on the sidelines and see how this plays out, because I think we’re going to be pretty surprised at how far and fast real estate prices will fall,” he said.
The market could bottom out by mid-2024.
“I’d postpone it next year,” Mr. North said.
“If you’re an owner-occupier and you need to move and you need to buy a home, fine, but keep in mind that you could lose capital.”
Mr North said buying a house to rent out now was a bad idea, despite the tight vacancy rate.
“Real estate investors, I wouldn’t go anywhere near real estate right now — there’s no capital appreciation, interest rates are rising,” he said.
“While rents are rising, that won’t be enough.”
Digital Finance Analytics makes predictions based on telephone surveys of 1,000 people per week, and compares them with official data to measure mortgage stress.