Housing prices in Australia are expected to drop by 15% over the next 18 months - with prices in Sydney and Melbourne pegged to fall by 18%, according to economists from Commonwealth Bank.
The warning comes as Australia's central bank raised interest rates by 50 basis points (0.5%) on Tuesday - the steepest increase in 22 years, which the economists say will have a "chilling" impact on Australian real estate when combined with more "aggressive" rate hikes expected to hit in the coming months, according to news.com.
Head of Australian economics at CBA Gareth Aird predicted an 11 per cent fall in Sydney house prices this year, followed by a further 7 per cent drop next year.
Melbourne would experience a 10 per cent drop over the rest of the year and another 8 per cent decline in 2023, the CBA analysis found.
Hobart’s hot property market was also expected to take a hit with a drop of 4 per cent in house prices this year and 9 per cent next year, with Canberra also expected to be impacted by the same declines. -News.com
CBA believes the official interest rate will rise as high as 2.1% by the end of this year, up from its current 0.85%.
Elsewhere, Aird predicted that prices in Darwin would drop by just 1% this year, and 9% next year, while Brisbaine, Adelaide and Perth would likely see increases this year before dropping between 8 and 11 percent in 2023.
Of note, the CBA's forecast has changed dramatically from the 3% drop in housing prices they previously predicted for 2022.
"Home prices will move lower from here given the RBA is expected to tighten policy via rate hikes quickly," said Aird. "The extent to which prices contract will depend in large part on the speed and magnitude at which the RBA lifts the cash rate."
During the last downturn in Australian real estate, houses slid nearly 10% nationally between mid-2018 through mid-2019, while Sydney in particular was hit with a decline of 15%.
That said, Aird has suggested that just because housing will dip, it won't crash because "the low jobless rate means households will continue to pay off mortgages but higher rates come at the expense of less discretionary spending."
But while Aird and the CBA thinks interest rates will rise as high as 2.1%, financial markets are pricing in 3% - which UBS economist George Tharenou warned would "likely crash housing and drive a recession."
The silver lining? CBA predicts that the Australian Central Bank will have to cut rates in mid-2023 almost as quickly as they raised them since the aggressive hikes will start tanking the economy to the tune of 2.1%, vs. 2022's expected growth of 3.5%.
"In the short-term however, housing markets will again be confronted by the fear factor with the usual predictions from the usual suspects of house price crashes and an uncertain outlook on rates and the economy, motivating buyers and sellers to sit on their hands," said Dr Andrew Wilson, consultant economist at Bluestone Home Loans. "The usually quieter winter selling season will be exacerbated this year by falling confidence and the fear factor resulting in likely continued downward pressure on home prices with non-discretionary sellers just having to accept what the market offers."
That said, overall demand for housing is expected to remain strong due to tight supply.
"With borders now open, migrants and international student numbers will surge, significant numbers of first homebuyers are set to take advantage of recently announced government support policies, and high levels of investors will continue to be attracted to rental markets with record low vacancy rates and skyrocketing rents," said Wilson. "And with recent underbuilding – particularly apartments – set to continue, the prospect remains of demand well below supply."