Australia’s stronger-than-expected housing boom will peak in mid 2022 before falling 5% in 2023 “as stretched affordability in most markets combines with the RBA’s first rate hike cycle since 2009”, Westpac says.
Until then, things will stay red hot. Prices nationally rose 12.2% over the first six months of 2021, an extraordinary 25.6% pace in annualised terms.
Westpac — like NAB –has revised its outlook upwards.
“Back in February we boldly predicted a 20% increase over 2021 and 2022,” Westpac says. That turned out to be overly cautious.
“A stronger than expected surge over the first half of 2021 is now expected to see prices up 18% in the first year alone,” it says.
“Lockdowns will see some loss of momentum in the third quarter, particularly in the Sydney market, but an eventual easing in restrictions should see activity rebound swiftly and price growth lift again into year end.”
Evidence of an 18% lift in prices nationally – including a 22% gain in Sydney – and a 7% increase in housing credit will set the scene for prudential policy tightening in the first half of 2022, Westpac says.
This will lead to a “mild” correction.
“Price growth is expected to slow to 5% in 2022 with most of the increase occurring in the first half,” it says.
“Prices are then expected to decline 5% in 2023 as stretched affordability in most markets combines with the RBA’s first rate hike cycle since 2009.”
Risk of massive housing correction ‘limited’
Several factors limit the risk of a harder landing for the market, Westpac says.
“Firstly, we do not expect regulators to take a heavy–handed approach to macro prudential tightening,” it says.
“Secondly, unlike in 2017–19, we do not expect to see additional damage from other developments – fears about potential changes to housing–related tax policy and the Banking Royal Commission both exacerbated the market correction in 2018–19.”
Finally, Westpac expect that the rate hike cycle will be quite benign with a peak cash rate of 1.25% being reached in the second half of 2024.
“We estimate that anything above 1.25% would push the household debt servicing ratio to levels that see significant stress on household finances,” it says.
“With inflation likely to remain well contained it will not be necessary to over tighten financial conditions.”