What’s Next For House Prices

Economists predict that Australia’s housing market will continue to deteriorate despite the election of a new Labour government and that current policies will be unable to ameliorate the impact of rising interest rates and rising living costs on Australian households.

Rising interest rates will be the one thing that shapes economic outcomes and the future of the housing market. Sydney and Melbourne’s house prices have already passed their peak, with the harbour city’s prices flattening in the first quarter of 2022 and Melbourne’s down by 0.7%. Rising interest rates will be the one thing that shapes economic outcomes and the future of the housing market. CBA is predicting prices nationally will flatline by the end of the year and drop by 8 per cent in 2023.

Policies like those on offer from both the Coalition (First Home Guarantee) and Labour (Help to Buy) have a bigger impact in an upward market than in a downturn. The Coalition and now the new government would have had more of an impact with their policies in a rising market because they are demand-driven schemes.

The Labour government’s agreement to continue to fund the Coalition’s Home Guarantee Scheme, which would equate to 60,000 places in the next financial year, was still a drop in the ocean. The numbers are relatively small, and rising interest rates have already had a significant impact on Sydney and Melbourne. This won’t be enough to impact the slump in prices.

Economists at Australia’s big four banks believe interest rate rises will have a bigger impact than any new policies introduced by the new government. Westpac said new policies would take some time to come into effect, meaning their impact, if any, wouldn’t be seen for months, if not years. Westpac has forecast a price fall of 2% across the country by the end of the year and a further 8% in 2023 and is not changing its stance. Housing and housing affordability were a big topic in this election, but the measures that have been put forward aren’t going to shift the dial for most people. 

A correction in house prices does eventually ease some of these affordability issues, but with interest rates rising, servicing the loan becomes more of a problem. The ANZ forecast, updated last week, of house prices falling nationally by 3% by the end of the year and by 8% next year remains unchanged. When economists made their new prediction last week, they already took a change in government into account.

The Labour government’s policy will help some first-time homebuyers get into the market, but it’s relatively limited. These policies that lift demand do tend to lift house prices, but their impact is likely to be relatively small.

While the Help to Buy scheme would help people into the market, it would take some time to get the monetary infrastructure into place before it could begin. Higher interest rates are going to be the biggest challenge for the market, but record-low unemployment and the reopening of international borders are things that will help to provide some support over the next couple of years.

Meanwhile, NAB was a little more upbeat about the property market this year, believing prices would rise by 2% before falling by 10% next year.