Australia’s housing market could experience its largest peak-to-trough fall on record, according to new forecasts made by T. Rowe Price, giving up all of the gains made during the COVID-19 period.
Head of Australian equities at the global investment management firm, Randal Jenneke, said that the current downturn is already the fastest on record, but noted that prices have a long way to go to reach levels seen in January 2020.
In previous downturns, he noted that house price declines typically continued until the Reserve Bank (RBA) not only stopped hiking interest rates but shifted to cutting. Including November’s 25 basis point (bp) hike, the RBA has so far delivered seven consecutive interest rate increases totalling 275 bps.
“At this stage, rate reductions seem like a high hurdle given the board’s determination to bring inflation back within a more tolerable band,” Mr Jenneke said.
“Indeed the RBA has modelled its own expectation of housing price falls and seems comfortable with a 20 per cent decline over two years. When was the last time our central bank was unperturbed by such a level of house price decline?”
Mr Jenneke noted that many borrowers have yet to feel the full effect of the rate hikes to date given that a significant proportion of loans were written at attractive fixed rates during the pandemic. Fixed-rate mortgages accounted for 46 per cent of new lending at its peak, up from 15 per cent.
“We estimate that approximately 50 per cent of the current residential mortgage loans on banks’ balance sheets were written over the COVID-19 period,” he said.
“This risks associated with writing housing loans, in one of the biggest housing booms and lowest unemployment period in decades, will be evident in coming years.”
As a result, Mr Jenneke said that there will be an “enormous wave” of mortgages transitioning to variable rates in 2023, from an average fixed rate of roughly 2 per cent, to a “rude” variable rate of 6.5 per cent based on current forecasts.
While the savings buffer built up by Australian households has often been cited as being able to provide protection from rising rates, Mr Jenneke argued that this was “rapidly evaporating” and would not sufficiently protect households from their mortgage adjustments next year.
“I probably have not made any new friends by highlighting the extent of the woes facing the local housing market. At the same time, we emphasise the importance to understand these issues and position appropriately,” he said.
“Our outlook and positioning has been cautious since late last year and we continue to prefer more defensive quality exposures that we believe will be better placed to weather the downturn.”
CoreLogic’s national home value index was down 1.2 per cent in October, with prices now 6 per cent below their peak following six consecutive months of decline.
AMP's chief economist, Dr Shane Oliver, has predicted that property prices will continue to fall over the next nine to 12 months as rate hikes continue to flow through and economic conditions deteriorate.
“There is a high risk that the pace of decline could reaccelerate next year, and we continue to expect that national home prices will have a top-to-bottom fall of 15 to 20 per cent out to around September quarter next year, of which we are only about one-third of the way through,” he said.
Dr Oliver also noted that there are several factors that will help put a floor under prices and drive an eventual recovery including government support programs, the tight rental property market, and rapidly rising immigration levels.
“But for now, the property market will be dominated by the cyclical impact of rising interest rates,” he added.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
