House prices will continue to rise into 2022 before falling in 2023, the Commonwealth Bank predicts

House prices will continue to rise into 2022 before falling in 2023, the Commonwealth Bank predicts
Photo: Peter Rae, SMH
  • The Commonwealth Bank predicts house prices will peak in 2022 around 7% higher than in 2021.
  • Key to its forecast is that the RBA will move on lifting the cash rate to at least 1.25% by the third quarter of 2023.
  • Gareth Aird, head of economics at CBA, said that at some point the tailwind of lower mortgage rate on prices will seize up unless there are further cuts in interest rates.
  • Visit Business Insider Australia’s homepage for more stories.

In line with forecasts from the other big four banks, the Commonwealth Bank of Australia predicts that house prices will hit a ceiling in 2022 before simmering into a correction period in 2023. 

CBA adjusted its house dwelling forecast slightly on Monday, saying that house price growth is expected to peak in 2022 around 7% higher than 2021, which is expected to end up 22% on last year. 

After the Reserve Bank of Australia begins its tightening cycle, CBA expects that the cash rate could lift to 1.25% by the third quarter of 2023, which could trigger an “orderly correction” of house prices by as much as 10%. 

Gareth Aird, head of economics at CBA, said that at some point the tailwind of lower mortgage rates on prices will seize up unless there are further cuts in interest rates.

“The Australian housing market is in the twilight of an incredible boom that has been fuelled by record low mortgage rates,” Aird said. 

“The phenomenal lift in prices is not over yet given dwelling prices are still rising briskly in most capital cities. But near term indicators of momentum coupled with the recent move higher in fixed rate mortgages suggest that conditions will moderate from here.”

Aird predicts that the economy will be at full employment by the third quarter of 2023, and that annual wages growth will have pushed to the RBA’s desired 3% range, forcing the central bank to lift the cash rate. 

Overall wage growth in Australia saw a 0.6% lift through the September quarter, while year-on-year wage growth swelled to 2.2% — still well short of the 3% growth or more the RBA is looking to capture.

Even still, the CBA economics team believes the RBA could start normalising the cash rate in late 2022. 

“Stronger wages growth will provide a partial offset to rising interest rates on the property market,” Aird said. 

“In addition, a lift in population growth as the international border reopens will boost the underlying demand for bricks and mortar, particularly inner city apartments. 

“As such, we expect house prices to decline by a little more than apartment prices over 2023.”

The prediction is largely in step with ANZ’s most recent house price update, where its team predicted house price growth is likely to slow over the next year to 6%.

The bank suggested the daunting cost of buying a home will deter many Australians desperate to enter the market.

Macroprudential tightening, like the Australian Prudential Regulation Authority’s October decision to ensure new borrowers can service a mortgage if interest rates jump 3%, up from 2.5%, will also put a brake on lending, the bank added.

Breaking with the Reserve Bank of Australia, ANZ also believes the underlying cash rate will lift in mid-2023, forcing retail banks to raise their own interest rates and passing those costs on to consumers.

Those factors will eventually cause house prices to dip 4% in 2023, ANZ suggested.

The RBA, however, continues to stand firm on holding the cash rate at 0.10% until inflation lands within its target band of between 2% and 3%, even as the market starts to price in interest rises from as early as next April. 

Earlier this month, both CBA and Westpac each lifted their borrowing rates after the RBA announced that it would do away with its April 2024 government bond yield target of 0.1%.

CBA, which has the largest share of Australia’s home loan lending market, lifted its previous below-2% fixed rate loan 35 basis points to 2.34% on Friday, while its four-year fixed rate loan was pushed 50 basis point to 2.89%.

The move came less than 24 hours after Westpac moved in the same direction, hiking its three-year fixed rate for owner-occupiers up 21 basis points to 2.29%, along with its four- and five-year fixed rates, which were each bumped 10 basis points to 2.69% and 2.99% respectively. 

As it stands, NAB has the lowest three-year fixed rate on offer, at 2.28% with a 3.91% comparison rate, while ANZ has the highest, with a three-year fixed rate of 2.39% and a comparison rate of 3.27%. 

But RBA governor Philip Lowe on Tuesday ruled out a cash rate hike in 2022, saying that lacklustre wage growth and an uncertain economic recovery from COVID-19 stand in the way.

“The latest data and forecasts do not warrant an increase in the cash rate in 2022,” Lowe told a meeting of the Australian Business Economists.

“The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest rates next year.”