Another week, another fresh take on where the housing market is going.
In the past month, all our major banks have changed their outlook for house prices and are now predicting the biggest housing crash in decades.
Economists at Commonwealth Bank and National Australia Bank are forecasting house prices to fall by 10% next year and Westpac forecast house price falls of 7% in 2023 and a further 5% in 2024.
Of course, these forecasts are predicated on the assumption that the Reserve Bank will begin raising interest rates later this year and housing will be “collateral damage in the RBA’s efforts to keep inflation on target in the medium term.
I thought I’d spend today discussing my thoughts with you – just you and me - no special guest on this show and I’ll give you even more reasons why I can’t see your property market crash ahead.
That way, at the end of the show, you’ll have more clarity and certainty about the housing market's future.
The major banks are predicting higher rates as soon as the middle of this year.
They are also predicting property values to drop significantly in 2023.
Will this really happen?
We know the Reserve Bank is being patient and may not raise rates as quickly as many expected.
In that case, ramifications for the housing market are unlikely to be as dramatic as those you're reading about in the media.
Of course, the banks have already raised fixed term interest rates over the last few months, and there's little doubt that we're past the peak of house price growth.
At the same time, buyers have more choices as vendors are placing their properties on the market for sale.
So back to the original question: What does all this mean for house prices moving forward?
Before I give you the answer to that, let’s just work through what’s likely to influence our property markets and the drivers that will affect house prices over the next year.
- Mortgage rates will rise independently of the RBA.
- They’ve already started rising.
- Mortgage rates will remain low by historical standards
- Despite the rises, the rates are still going to be low when compared to the past.
- Households are sitting on an unusual amount of savings.
- Household wealth has surged, along with the value of assets.
- Low stock availability and the strength of buyer interest will underpin the property markets.
- Investors, equity gains, and transaction volumes
- The RBA is waiting for wages to grow further.
- By the time the RBA raises the rates, wage rises, and a strengthened economy should be in place.
Currently, Reserve Bank interest rates are low to bolster the economy and stimulate inflation and wages growth.
Once the Reserve Bank believes inflation is comfortably and consistently within its desired band of 2 -3% and unemployment is low enough to cause significant wages growth, then the RBA will slowly raise its interest rates from stimulatory levels to neutral levels.
While falling interest rates create extra borrowing capacity and therefore increase housing affordability, rising interest rates do not necessarily cause house prices to fall.
While some commentators are concerned rising rates will cause mortgage defaults, there are several reasons why this is unlikely to occur:
- In general, Australian households are wealthier than ever and have more equity in their homes because of our property boom.
- Banks' stringent lending criteria have only ensured they have only been lending to borrowers who could withstand a 2 or 3% rise in interest rates.
- Many Aussie households have taken advantage of the current low-interest-rate environment and are three or four months ahead in their mortgage payments.
- Our economy is bounding along, unemployment levels are low, and with the prospect of wages rising ahead, most households should not feel mortgage stress.
So, the bottom line is you don’t have to lose any sleep – the housing market won’t crash, and the value of your home won’t plummet.
However, property price growth will slow-moving forward, as always happens in cyclical markets.
Links and Resources:
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Some of our favourite quotes from the show:
“New borrowers haven’t necessarily seen their money shrink.” – Michael Yardney
“Interest rates aren’t going to go up to the level that will cause property values to slump, but yet, mortgage rates from the banks will go up.” – Michael Yardney
“Reading’s essential in creativity, in innovation, and for learning from the outcomes of history. It’s an opportunity to open your imagination to other possibilities.” – Michael Yardney
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