The Commonwealth Bank or CBA believes house prices will tumble 10%, and it predicts when this will happen. CBA’s head of Australian economics, Gareth Aird, said he expected property price growth to moderate in the first half of next year, but 2023 would see a drop.

According to Aird, home prices in Sydney would drop by 10% over 2023 as the RBA takes the cash rate to 1.25 by the third quarter of that year. The current official cash rate is 0.10%.

The phenomenal rise in prices is not over yet, given that house prices are still rising rapidly in most metropolitan areas,” he said. “But near-term momentum indicators, coupled with the recent rise in fixed-rate mortgages, suggest that conditions will ease from now on.”

There are signs that the rise in property prices is losing momentum. One was a decision in October by the Australian housing bank. expand the buffer on the ability of borrowers to make payments on the loan at least 3 % points higher than the rate on the loan from 2.5 %points earlier.

Banks have also raised their spending on fixed-rate mortgages, reflecting their own higher cost of capital, as investor expectations for inflation have risen globally in recent weeks.

The big banks have already started raising the interest rate they charge on a fixed rate

They expect an orderly correction in home prices of around 10% in 2023 as the RBA takes the cash rate to 1.25 % by Q3 2023. The third quarter of 2023, or Q3, begins in July and goes until September.

Aird said house prices would be dependent on the RBA’s cash rate decision, which the CBA believed would rise sooner than initially anticipated. Also, he added that it is expected the RBA to start increasing the cash rate gradually from November 2022, but in the meantime, house prices would continue to rise. He said house prices were expected to peak next year at around 7 % higher than this year.

The Australian housing market is in the twilight of an incredible boom that has been fuelled by record-breaking low mortgage rates.

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.

Could this really be the end of the property boom?

According to them, yes. 

Aird said there was actually a simple explanation as to why.

The price that someone is willing and able to pay for a home is predominantly influenced by two things: income and borrowing rates.

As home prices move higher, affordability becomes stretched. That can be improved via a reduction in mortgage rates or higher income.

But at some point, the tailwind of a drop in home prices wanes unless there are further cuts in interest rates.

In addition, Aird said, a lift in population growth as the international border reopened would 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. 

When will interest rates rise?

The Commonwealth bank was expecting the RBA to gradually increase the cash rate to 1.25 % by July next year.

The cash rate is forecast to lift because the economy will be at full employment and annual wage growth will have been pushed to the desired level of 3 %. Stronger wage growth will provide a partial offset to rising interest rates on the property market.

About loan rates being cheaper

The CBA predicts that house prices will rise 25% nationwide this year, compared with a 14% rise for apartments. However, by 2023, apartment prices are projected to fall 7%, or less than the expected drop in home prices, the bank declared. 

The rise in income is partly offsetting the higher costs already being felt by some borrowers as banks raise rates on fixed-rate loans. The expected resumption of population growth as borders reopen to migrants and students should also mitigate some of the expected downturns, especially for apartments.

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