Sydney, Melbourne real estate: Fitch credit rating agency predicts 20 per cent fall in house prices

House prices in Australia are likely to fall by 20 percent, an international credit rating agency has forecast.

Fitch Ratings predicts that the Reserve Bank of Australia will continue to raise interest rates through 2023 until they reach an 11-year high of 3.35 percent, up from the current nine-year high of 2.85 percent.

As that happens, the New York-based credit ratings agency expects Australian house prices to fall 17 to 20 percent from their peak in 2022.

If that scenario comes to fruition, the median home price in Sydney would fall $240,883 to $283,392 from a high of $1.42 million in April this year.

In the worst case, they would drop to $1.11 million, according to CoreLogic data.

Sydney house prices in November fell another 1.5 percent to $1.24 million, having already fallen 11.9 percent this year in Australia’s hardest-hit capital market.

While Australia has maintained its AAA credit rating, Fitch noted that Australians had the highest debt to 190 percent after-tax income and therefore “will likely face pressure from increasing service charges for Debt”.

Fitch predicted that a small proportion of mortgage-stressed borrowers would be forced to sell, but noted that most Australians with a mortgage would survive by cutting spending.

“We expect the rate increase to discourage consumption, rather than pose risks to financial stability, although a small share of households could face stress,” he said.

Fitch said only a small number of borrowers would owe their bank more than their home was worth because home prices were still above pre-pandemic levels in early 2020.

“Only a small portion of borrowers are likely to fall into negative equity as we forecast prices to remain above pre-pandemic levels and recover modestly in 2024,” he said.

But that could change if unemployment rises sharply from October’s 48-year low of 3.4 percent, as interest rate hikes caused a sharp economic downturn.

“A steeper housing correction, coupled with a labor market shock well above our baseline, would increase pressure on the financial sector,” Fitch said.

Banks are required to assess a potential borrower’s ability to cope with a three percentage point increase in variable mortgage rates under Australian Prudential Regulation Authority rules.

“Prudent mortgage servicing buffers instituted by regulators mean most homes have been assessed at rates close to prevailing levels,” Fitch said.

Borrowers since May have faced 2.75 percentage point rate hikes and Fitch, like most economists, expects another 0.25 percentage point hike on Tuesday.

That would take the RBA cash rate to a 10-year high of 3.1 percent, with borrowers bearing three percentage points of rate increases since the era of the record 0.1 percent cash rate ended. seven months ago.

Nearly two thirds or 65 per cent of Australian borrowers have an adjustable rate mortgage.

Many Australians also pegged their 2020 and 2021 mortgages at just 2 per cent when the RBA cash rate was still at 0.1 per cent.

But Fitch expects two-thirds of those fixed-rate loan periods to expire at the end of 2023.

Regarding inflation, Fitch expected it to peak at 7.8% in 2022 and drop to 3.5% by 2023.

They are certainly more optimistic than the Reserve Bank of Australia, which expects headline inflation to peak at 8% by the end of 2022 and fall to 4.75% by the end of next year.

The RBA expects inflation to stay above its 2 to 3 percent target through 2025.

Inflation in the year to September reached a 32-year high of 7.3 percent, but the annual pace slowed to 6.9 percent in October in the new monthly series from the Australian Bureau of Statistics.