Despite the hype, house prices are not set to decline

It is likely that house prices in the next couple of years will be higher than the current prices, so prospective buyers who are waiting for price reductions may be disappointed.

Interest rate risk overstated 

Low mortgage rates are still attractive for investors, and asking rents are rising much more quickly now, up by about 10 per cent over the past year. 

Recently there have been some calls for the Reserve Bank to increase the cash rate sooner than previously expected, markets looking for a potential increase of up to 1 per cent in 2022, but even in that scenario mortgage repayments would remain comfortable. 

It is unlikely that there will be an increase in the cash rate in 2022.  

The RBA has made it clear that a number of conditions need to be met for the cash rate to increase. Primarily, the inflation rate should be sustained (i.e. over a few quarters) within the 2 to 3 per cent range, which is the bank’s target. 

Some of the major contributing factors to the current inflation rate include commodity prices and supply-chain issues. These are global factors and are likely to be mitigated over time. Employment conditions and wages growth should improve solidly over the next few quarters, but the immigration reboot is likely to take the pressure off wages growth again later next year. 

Combined with elevated under-employment and underutilisation, this means it’s unlikely that wages growth and employment measures will show a consistent improvement so quickly. When the cash rate is finally increased, it’s also highly likely that the increases will be gradual to assess the impact on markets. 

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Solid demand for housing 

In New South Wales and Queensland, we are certainly seeing that the incomes of some of our property buying clients are increasing for professional roles due to the current skills shortage. In addition, lending figures and historically strong auction clearance rates over the past week also show that the market remains strong.  

The immigration intake next year itself will only add to housing demand, and houses and other family-suitable properties are experiencing strong demand across many areas of the country. 

Interest repayments and out-of-pocket costs remain low 

Mortgage interest repayments, which form a substantial proportion of the out-of-pocket costs for investors and owner-occupiers, remain very low. 

Last quarter we saw a record share of borrowers taking on fixed-rate terms, confirming that property insiders agree the bottom of the interest rate cycle is in. But context is important, and the share of household income expended on interest repayments is tracking close to as low as we’ve seen over the past four decades. 

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Even 100 basis points of interest rate increases from here can be absorbed by the market, as interest rates (and consequently monthly repayments) will still remain favourable in comparison to historical averages. For example, the fortnightly repayments for an $800,000 principal and interest home loan, taken out for 30 years, would be increased by around $200.  

The top-end of the market may be more impacted by such a move, but overall the demand for housing finance we expect to remain strong. 


Figure 1 – Interest repayments

At the coal face, we are seeing many more auctions and listings come online now in Sydney and Melbourne, which is a healthier dynamic for the market and will naturally cool the rate of price growth. But overall, activity is still very buoyant and we expect to see prices higher than today by the end of 2023.

Steadier price increases forecast

We don’t expect the Reserve Bank to increase the cash rate in 2022, and there is fierce competition between banks and non-bank lenders, keeping a certain level of downward pressure on mortgage rates.

We expect to see dwelling prices rise by between 5 per cent and 8 per cent in 2022, in the absence of substantial macroprudential restrictions. And two years from now we expect to see dwelling prices that are higher than today.

Two years from now we expect to see dwelling prices that are higher than today.

Dwelling price forecasts

Nationally, we expect a price increase in the range of 5 to 8 per cent in 2022. Houses and other family-suitable properties, particularly in the more affordable areas in New South Wales, Victoria, and south-east Queensland, are expected to be at the higher end of that range. However, properties at the top end of the market are likely to deliver slower capital growth.

Overall, it is likely that dwelling prices in a couple of years will be higher than the current prices. Prospective buyers who are now waiting for price reductions will be disappointed. Mortgage brokers are currently busy adjusting to new serviceability rules, but mortgage demand remains fairly bullish as COVID restrictions are eased.

Election years come with their own uncertainties, but the talk of significant price declines due to a fast interest rate hiking cycle is overdone. It is expected that 2022 will be a very busy year for housing market transactions, especially for investors.

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