Australian house prices could plunge by 20 per cent with Sydney and Melbourne set to suffer biggest declines as interest rates soar to curb the worst inflation in decades.
Investment bank Jarden fears the biggest property market downturn since 1980, with the Reserve Bank of Australia now expecting inflation to hit seven per cent by the end of 2022 for the first time in 32 years.
Australia’s big banks are forecasting four more RBA rate rises by Christmas which could see a borrower with a typical $600,000 owe $582 more every month on mortgage repayments.
Investment bank Jarden has predicted that house prices will cop a peak to trough decline of up to 20 per cent based upon analysis
The fall in prices would mark Australia’s biggest housing market correction in four decades
Jarden Australia chief economist Carlos Cacho said inflation was likely get worse, reaching 6.7 per cent by September, the highest annual pace since late 1990.
In this environment, national house prices would fall by 15 to 20 per cent by the end of 2023 as higher interest rates diminished the lending capacity of banks.
‘This would be the largest house price correction since at least 1980, in both real and nominal terms,’ Mr Cacho said.
He predicted a five per cent drop in 2022 followed by a 10 to 15 per cent decline in 2023, with ‘faster and larger’ falls in Sydney and Melbourne.
This would be worse than the decline in the early 1990s, after interest rates reached 17.5 per cent, and between 2017 and 2019, after the Australian Prudential Regulation Authority tightened the rules on interest-only and investor loans.
Mr Cacho added that the implications following increases to inflation and the cash rate would be ‘dire’ for the housing market unless there was a ‘shift’.
Reserve Bank governor Philip Lowe (pictured) said on Tuesday that inflation is expected to hit seven per cent by the end of 2022 – which would be the highest level since the June quarter of 1990 ahead of a recession the following year
Jarden claimed interest rate hikes and the Reserve Bank cracking down on lending has resulted in house prices falling
Reserve Bank of Australia governor Philip Lowe is now expecting inflation to hit seven per cent by the end of 2022, reaching a level unseen since the middle of 1990 – a year before a recession occurred.
He also conceded the cash rate could rise to 2.5 per cent next year for the first time since February 2015.
Dr Lowe expects inflation to hit seven per cent by the end of 2022, while the cash rate could climb to 2.5 per cent.
This would see a typical borrower with a $600,000 mortgage owe the bank $725 extra a month on their repayments.
Dr Lowe admitted bringing inflation within the central bank’s target would be difficult, in his first appearance since the RBA this month raised the cash rate by half a percentage point.
‘At the moment, it’s five per cent and by the end of the year, I expect inflation to get to seven per cent,’ he told the ABC 7.30 host Leigh Sales in a rare interview.
Chief economist Carlos Cacho said the implications would be ‘dire’ for the housing market unless there was a ‘shift’
‘That’s a very high number and we need to be able to chart a course back to two to three per cent inflation.
‘I’m confident we can do that but it’s going to take time.
‘With inflation being as high as it is, and with interest rates as low as they are, we thought it was important to take a decisive step to normalise monetary conditions and we did that at the last meeting.’
He said it is reasonable to expect the cash rate will get to 2.5 per cent at some point, but said it will be driven by events.
The cash rate now stands at 0.85 per cent – the highest level since October 2019 before the pandemic – after the RBA raised it at consecutive board meetings in May and June from a record low 0.1 per cent.
Borrowers are being warned the cash rate could surge to 2.5 per cent for the first time in eight years, which would see a typical borrower with a $600,000 mortgage owe the bank $725 extra a month on their repayments (pictured are houses in Melbourne)
An increase to 2.5 per cent for the first time since February 2015 would mark the steepest increase in the RBA cash rate within a year since 1994.
Should the cash rate hit that level, a borrower with an average $600,000 mortgage would see their monthly repayments climb by $725 from $2,384 to $3,109.
That’s based on an existing mortgage rate surging from 2.54 per cent – under the old cash rate of 0.35 per cent until variable rates go up this month – to 4.69 per cent.
Just last year, the RBA had repeatedly said it would keep the cash rate at 0.1 per cent until 2024 ‘at the earliest’, but Dr Lowe said that was never a promise.
‘The economy didn’t evolve as we expected. It’s been much more resilient and inflation has been higher. We thought we needed to respond to that,’ he said.
How much YOU could be paying on your mortgage by Christmas
$500,000: Up $485 from $1,987 to $2,472
$600,000: Up $582 from $2,384 to $2,966
$700,000: Up $679 from $2,781 to $3,460
$800,000: Up $777 from $3,178 to $3,955
$900,000: Up $874 from $3,575 to $4,449
$1,000,000: Up $970 from $3,973 to $4,943
The monthly repayment calculations are based on a typical Commonwealth Bank variable rate rising from 2.54 per cent to 4.29 per cent in line with the cash rate moving from 0.35 per cent to 2.1 per cent. Figures relate to banks before they adjust to new 0.85 per cent cash rate later this month