Era of through-the-roof house prices in Australia set to end

Australian house prices will fall sharply this year and next as rising mortgage rates and cost of living pressures drag on demand, a Reuters poll found, but for many people buying a home will still remain far out of reach.

Pandemic-related stimulus and cheap loans have nearly doubled house prices since the 2007-09 global financial crisis, increasing homeowners’ wealth, but that has also kept millennials and first-time homebuyers off the property ladder.

After rising about one-third during the pandemic, home prices nationally sank 1.6% in July. It was the largest monthly drop since 1983 and dragged annual price growth down to 4.7%, from a peak above 21% late last year.

Average home prices were expected to decline 6.5% this year, according to an Aug 15-Sept. 2 Reuters survey of 10 property analysts, versus an expected 1.0% rise in a May poll.

A further 9.0% fall was expected next year.

“The property boom is well and truly over as the surge in mortgage rates is pulling the rug out from under it,” said Shane Oliver, chief economist at AMP.

“There are three reasons why this downturn will likely be deeper and the recovery slower than in past cycles: high household debt levels, high home price to income levels and an end in the long-term downtrend in interest rates.”

The Reserve Bank of Australia (RBA) has already lifted rates by 175 basis points since May and is expected to hike by another half-point on Tuesday in an effort to contain surging inflation.

Markets are wagering the current 1.85% cash rate could be near 4.0% by the middle of next year. Banks have sharply raised borrowing costs on new fixed-rate mortgages and tightened lending standards.

“The path of interest rates will dominate the housing outlook. A steep increase in mortgage rates between May and the end of this year will weigh heavily on house prices,” said Adelaide Timbrell, senior economist at ANZ.

“Still, a substantial correction is required to return housing affordability and housing prices to fair levels.”

It will also be a greater challenge for some of the more heavily-indebted households in a country, which currently has a record A$2 trillion ($1.4 trillion) of mortgage debt outstanding.

ANZ, Bank of Queensland, Capital Economics and Knight Frank said average house prices would have to fall by between 10-35% – roughly the amount U.S. house prices tumbled during the global financial crisis – to make Australian housing affordable.

Property prices in Sydney, the world’s second-most expensive housing market after Hong Kong, and Melbourne were forecast to fall 7.0-10.0% this year and 7.0% next.

($1 = 1.4686 Australian dollars)