House prices are expected to slow in the first half of 2022 before diving into the red in 2023, with rising fixed rates being one of the main drivers.

CommBank head of Australian Economics Gareth Aird said the housing market is now in the “twilight” of the booming phase sparked by low mortgage rates.

“Indicators of near-term momentum, coupled with the recent rise in fixed-rate mortgages, suggest conditions will moderate from here,” said Mr Aird.

Lenders are currently following the trend of interest rate hikes, both for owner-occupiers and investors.

CommBank’s forecasts reveal a 22% increase in house prices by the end of the current year.

“From there, we expect prices to continue to rise in the first half of 2022, but at a more modest pace,” said Mr Aird.

By the end of 2022, prices are likely to peak, reaching a value 7% higher than the level at the end of 2021.

“We then expect an orderly correction in house prices of 10% in 2023,” said Mr Aird.

However, this decline needs to be put in context.

“A 10% drop in national house prices in 2023 in our view will just bring prices back to where they were in the third quarter of 2021,” he said.

How interest rates affect price movements

Mr Aird said in the simplest terms that income and borrowing rates ultimately determine the price a person is willing and able to pay for a home.

“As home prices rise, affordability is stretched — that could be improved by cutting mortgage rates or increasing income,” he said.

“But at some point, the tailwind of lower mortgage rates will ease unless interest rates are further cut.”

When prices rise, interest rates become a headwind.

“That’s where we’re headed over the next two years, given our expectation that the RBA will begin to normalize cash rates by the end of 2022,” said Mr. Aird.

The prediction that house prices will fall by 2023 stems from the projected gradual rise in cash interest rates, which are likely to reach 1.25% by the third quarter of the same year.

CommBank forecasts that the RBA will gradually raise the spot rate to 1.25% by the third quarter of 2023.

The RBA is expected to move the needle by November 2022, raising the spot rate by 15 basis points for the first time in two years.

“Cash interest rates are expected to rise as the economy will be fully engaged and annual wage growth will have risen to the desired level of 3%,” said Mr Aird.

“Stronger wage growth will partially offset rising interest rates in the property market.”

Interestingly, Mr Aird said the reopening of international borders is likely to boost demand for inner-city apartments.

“As such, we expect house prices to fall slightly more than apartment prices in 2023,” he said.

Photo by Julienne Alviar on Unsplash.

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