Westpac has lifted its forecast for dwelling prices with 10% gains now expected in both 2021 and 2022. 
The bank then expects this boom to be followed by a flattening out in 2023 as rising fixed-term interest rates, combined with prudential measures aimed at reining in the associated lift in leverage.
These headwinds are not expected to emerge until 2022, with prudential measures likely to be timed for the second half of 2022 according to Bill Evans, chief economist, and Matthew Hassan, senior economist for Westpac.
The bank revised its previous less bullish forecasts because the last four months have seen a faster and stronger than expected turnaround, particularly in markets that will see little or no effects from the Covid related headwinds.
Westpac still has concerns about lingering areas of weakness – in particular the Melbourne and Sydney high-rise markets, but these now look likely to be a more a minor drag on the rest of the broader market which is in the midst of a strong surge.
The upturn is being supported by record low-interest rates; the confident expectation amongst borrowers that these rates will remain low for years to come; ample credit supply; and an improving economic backdrop, as the roll-out of vaccines promises to bring the pandemic to an end and drives a sustained lift in confidence.
Clearly, buyer demand has run well ahead of ‘on market’ supply, with sales outstripping new listings by 34% over the last six months and ‘stock on market’ down to just 2.5 months of sales – the long-run average is 3.8.
A lift in new listings will no doubt be forthcoming but for now, this is clearly a seller’s market.
Coupled with the very high auction clearance rates recorded in Sydney and Melbourne over the first half of February (averaging 85% and 76% respectively, the latter despite another brief virus lockdown) and what looks to be a 1%+ rise in prices for the month, the picture is of a strong lift in momentum carrying into 2021.
Investors will return
The upswing is also likely to see a rebalancing towards investors according to Westpac, particularly as affordability constraints re-emerge for owner occupiers, including first home buyers.
The investor segment accounted for less than 25% of new home loans over the second half of 2020 but usually averages over 35% and rises in periods of housing upswings.
Some tentative early evidence here is the 15% increase in new lending for investors in the last two months.
Migration inflows an area of uncertainty
One aspect of the forward view that is particularly uncertain for Westpac is the potential for wider market impacts from the slowdown in migration. 
Aside from the direct effects on specific segments, the slowdown will also mean new dwelling construction will have run well ahead of population-driven requirements in 2020 and 2021.
If borders remain closed for longer or migration inflows are slow to restart that could lead to a market-wide physical oversupply of dwellings by 2022.
How that may influence market conditions and price growth is unclear.
For example, rental vacancy rates may remain elevated for longer, perhaps even pushing higher, but that may not do much to deter investors seeking expected price gains, particularly as rental yields are likely to remain above funding costs.
The bottom line
The bottom line is that Australia’s housing upturn now has strong momentum that looks to be lifting further and will remain well supported by monetary conditions and an improving economic backdrop.
Westpac now expects the upswing to generate stronger, double-digit, price growth near term while their expectation, back in September last year, remains that a policy response can be expected later in 2022 which will settle markets into 2023.
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