House prices look likely to peak in December at their strongest growth rate since the 1980s, before dramatically slowing down in 2022 and falling in 2023, a new forecast shows.
“This would be the strongest growth since the late 1980s boom,” ANZ Senior Economist Felicity Emmett said.
“But a slowdown is in sight, with tighter credit, rising fixed mortgage rates and a large increase in stock on the market combined with decreased affordability all set to dampen price growth in 2022.”
Ms Emmett, who co-authored the report with fellow ANZ Senior Economist Adelaide Timbrell, said house prices would fall modestly, about four per cent, as higher fixed rates “really start to bite”.
The reports shows that monthly price gains peaked in March at 2.6 per cent month-on-month, and had been gradually falling since, with price growth in October of 1.4 per cent.
Prices have become more divergent across the country with Brisbane prices increasing 2.5 per cent month-on-month in October, while Perth remained flat.
Other notable differences including Hobart prices rising 1.9 per cent, Adelaide 1.8 per cent and Sydney 1.6 per cent, compared to Melbourne’s slight increase of 0.7 per cent.
Ms Emmett said housing finance had wound back and slowed house price growth.
“The recent weakness in housing finance suggests that price growth will slow over the coming months,” she said.
“New lending finance to owner-occupiers has peaked: first home buyer finance has been trending down since the top in January. Finance to other owner-occupiers has fallen 10 per cent over the past two months.”
Investor finance growth remains positive, according to the repot, after more than doubling in the year to May.
Ms Timbrell said affordability constraints and improved supply-demand balance would help slow prices, interest rates would also play a crucial role.
“We see the RBA on hold until H1 2023, but fixed mortgage rates are already rising,” she said.
“A faster-than-expected rise increases the risk that prices slow more than we currently expect, and vice versa.”
Finance stability and lending
The Australian Prudential Regulatory Authority (APRA) tightened lending criteria in early October, lifting the interest rate serviceability buffer from 2.5 per cent to 3 per cent.
APRA tipped this would result in a modest pairing back of housing credit growth and reduce borrowing capacity by about five per cent.
“Another lift in the buffer or a measure which targets a combination of high debt-to-income and high-LVR loans is the most likely in our view,” Ms Timbrell said.
“But financial conditions are already tightening and the market may do some of APRA’s work for it.
“Indeed, the rise in fixed mortgage rates over the past few weeks may see lending slow enough to obviate the need for further macroprudential measures.”
The report also highlighted the strong savings buffers many were able to accrue on the back of COVID-19 lockdowns and restrictions, with some household growing savings rations of 10 to 22 per cent.
This is compared to between three and seven per cent before the pandemic.
The strong buffers lower the risk of arrears should interest rates increase or economic shocks eventuate.
“The RBA estimates that the household savings ratio through the Delta wave lockdowns (Q3 2021) was around 17 per cent,” Ms Emmett said.
“Strong household savings and rebounding economic growth leading up to Delta, as well as the smaller employment impact of Delta lockdowns compared to 2020, reduced lockdown impacts on mortgages.
“The share of high debt, low buffer households was lower in August 2021 across all states compared with January 2020, despite Delta lockdowns. This reduces the risk of arrears, particularly as interest rates rise.”
The amount of mortgages that were deferred during the Delta lockdowns dropped from 12 per cent in April 2020, to less than one per cent.
But, concerningly, the percentage of mortgages where borrowing was six or more times the household income jumped throughout 2021, to 22 per cent in the second quarter.
“We expected this to rise again in the third quarter,” Ms Emmett said.
“While we expect the labour market to stay strong and for interest rates to rise slowly, a shock on either front could be magnified due to higher debt-to-income ratios.”
Ms Emmett said some workers, such as those in hospitality, were more likely to have higher debt-to-income ratios.
“This puts some homeowners at higher risk of arrears if the labour market turns,” she said.
“A third of families in a survey in May-June 2021 reported experiencing a financial stress incident, which suggests that despite strong economic growth going into Delta, there was some stress.”