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CBA forecasts a 10% drop in house prices in 2023

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According to the latest forecasts issued by Commonwealth Bank Australia, house prices across all of Australia’s capital cities are expected to fall by 10% in 2023 after skyrocketing in 2022. Why?


It seems our ‘smoking hot’ property market is cooling due to higher borrowing costs and ‘natural fatigue’, says CBA.


Gareth Aird – Head of Economics for CBA says that Sydney house prices in particular will moderate to a 6% advance in 2022 – following the fastest gains in 2021 and a 27% forecast jump. However, by 2023, Sydney’s prices will drop by 12%, matching Hobart’s predicted decline.


As for Melbourne, the CBA tips an 8% advance in prices in 2022 before a 10% decline in 2023 Melbourne.


That’s a whole lot of numbers. But what does it all mean?!


As we near the end of 2021, CBA estimates that property prices will have risen by 22%. According to Aird, the Australian housing market has seemingly just experienced “the twilight of an incredible boom” driven by record-low mortgage rates. This is amazing for those of you who have sold your home this year! But Aird’s use of past tense might make future sellers a little nervous…


The good news is CBA expects prices will rise a further 7% in 2022 before dropping the following year as a direct response to rising interest rates. So sellers, you may just be able to sell for a significantly higher price in 2022 – if you can engage a buyer.



Surplus of homes


In late November, CoreLogic reported the busiest week for auctions since late March, and the fourth busiest since the commencement of their property data collection service in 2008.


Research Director Tim Lawless indicated that new listings are surging upwards – and the data doesn’t lie. Sydney is currently sitting at 30% higher than the 5-year average for this time of year, while Melbourne is also right up there at 26%.


Aird however downplays the role of supply in the market when it comes to house prices, suggesting that income and borrowing rates are the main strains affecting property prices. And this is what brings us back to the forecasted 10% drop.


Aird predicts that the Reserve Bank of Australia will begin a “gradual and shallow” cycle from 2022, altering the official cash rate from its current record low of 0.1% to 1.25% by Q3 2023.



What do the other banks predict?


According to ANZ, the average capital city house price is expected to drop by 4% in 2023 following a rise of 6% in 2022. And in October, Westpac’s property outlook was far more optimistic than CBA’s, noting a predicted decline of just 5% in 2023.


But if these banks all share the same knowledge, why the different predictions?



The methodology of house price forecasts


Aird says that to forecast a fall in house prices, we need to keep in mind the context. With impressive price rises throughout 2021 and further gains forecast in 2022, a decline of 10% in 2023 follows CBA’s figures back to where they were in the third quarter of 2021.


CBA further predicts that the Reserve Bank will push the first interest rate rise to 0.25% by November 2022, followed by another rise in December to 0.50%. Further rate rises of 25 basis points are expected to occur in the first, second and third quarter of 2023, bringing the cash rate to 1.25%.

As Aird points out, rate rises will put “downward pressure” on the need for credit, resulting in house prices correcting lower. And because the trail of interest rates is the main risk to its long-term forecasts, if the Reserve Bank is more aggressive with its policy or tightens earlier than the CBA’s forecast profile for the cash rate, Aird expects house prices to drop even further than his initial prediction.


On the other hand, if the Reserve Bank tightens policy later than anticipated, the CBA would expect a smaller decline in home prices in 2023.



Signs of change


Those with a keen interest in the property sector have warned of a property price decrease in the near future – and it seems the evidence was there all along.


The first sign was when the Australian Prudential Regulation Authority decided in October 2021 to expand the buffer on a borrower’s ability to make loan repayments to at least 3 percentage points above the loan rate – a 0.5 point increase on the previous buffer.


The second was when banks lifted their fixed-rate mortgage costs, demonstrating their own higher cost of capital as investors’ inflation predictions increased across the globe in recent weeks.


So my advice to buyers and sellers is to keep your finger to the pulse with this changing market, observe the Reserve Bank’s policy, and compare and contrast expert forecasts over time so you can buy or sell with confidence when the time comes.

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