Why Australian house prices will drop in 2023 as banks hike interest rates multiple times in weeks

House prices in Australia are expected to start falling, with the two biggest banks repeatedly raising mortgage rates in just a few weeks – the rest will follow.

The median home price in Sydney has jumped 30.4% in the past year to $ 1.334 million, which is very unaffordable.

The 21.6% national increase in October, for both houses and apartments, was the fastest annual pace since the start of 1989, according to data from CoreLogic.

Westpac, Australia’s second-largest bank, now expects house prices to rise in 2021 before slowing down next year and falling in 2023.

This is expected to come as the big banks continue to raise mortgage rates as inflationary pressures increasingly worry the Reserve Bank of Australia.

Home prices across Australia are expected to start falling, with the two biggest banks raising mortgage rates several times in just a few weeks (pictured, an auction in Hurlstone Park in western Sydney in May before closures)

The typical national house price of $ 686,339 is now so expensive that an average full-time worker with $ 90,329 a year is expected to be six times their salary, even with a 20 percent mortgage deposit factored in.

Commonwealth Bank raises fixed rates

ONE YEAR: Up 0.35 percentage point to 2.34 percent

TWO YEARS: Up 0.25 percentage point to 2.34 percent

THREE YEARS: Up 0.4 percentage point to 2.69 percent

FOUR YEARS: Up 0.5 percentage point to 2.89 percent

FIVE YEARS: Up 0.1 percentage point to 3.09 percent

Source: RateCity

This means that a typical professional would already have a hard time paying off a $ 550,000 loan without experiencing mortgage stress where they cannot pay their bills.

The Australian Prudential Regulation Authority considers a debt-to-income ratio of six or more to be risky.

The Commonwealth Bank, Australia’s largest mortgage lender, joined Westpac on Friday in raising its fixed mortgage rates, inflicting more suffering on heavily indebted borrowers for the second time in just three weeks.

RateCity estimated that the latest 0.5 percentage point increase in four-year fixed rates to 2.89% would add $ 131 to monthly mortgage payments on a $ 500,000 loan, compared to the old one. fixed rate.

The 0.4 percentage point increase in three-year fixed rates to 2.69 percent would add $ 104 per month to mortgage management fees.

A Commonwealth Bank borrower who did not fix their rate before the increase would pay an additional $ 5,503 in repayments over the term of the fixed rate, unless they were prepared to pay a foreclosure fee of $ 375.

Borrowers benefit from a standard variable loan unless they subscribe to a new fixed rate.

RateCity’s research director, Sally Tindall, said the ANZ and the National Australia Bank are also expected to increase their fixed rates “in a few days” after the Reserve Bank said this week it was more concerned about the ‘inflation.

The Commonwealth Bank, Australia's largest mortgage lender, joined Westpac on Friday in raising its fixed mortgage rates, inflicting more pain on heavily indebted borrowers for the second time in just three weeks (pictured, houses under construction in Schofields in North West Sydney)

The Commonwealth Bank, Australia’s largest mortgage lender, joined Westpac on Friday in raising its fixed mortgage rates, inflicting more pain on heavily indebted borrowers for the second time in just three weeks (pictured, houses under construction in Schofields in North West Sydney)

“The speed at which global economies are improving has driven up the cost of purchasing funds, putting pressure on banks to raise fixed rates,” she said.

Westpac raises fixed rate mortgages

THREE YEARS: Up 0.21 percentage point to 2.29 percent

FOUR YEARS: Up 0.1 percentage point to 2.69 percent

FIVE YEARS: Up 0.1 percentage point to 2.99 percent

“CBA has abandoned its efforts to keep at least one fixed rate below 2%.

“While a rate starting with a ‘one’ was a great marketing tool, it was clearly unsustainable for the bank.

“Despite yesterday’s hikes, Westpac still has two fixed rates below 2%, however, in this climate it’s hard to see those rates stick around much longer.”

Westpac on Thursday raised its fixed rates, increasing the term of three-year mortgages by 0.21 percentage points to 2.29%.

Four-year fixed rates rose 0.1 percentage point to 2.69 percent and five-year fixed rates rose 0.1 percentage point to 2.99 percent.

Reserve Bank Governor Philip Lowe hinted on Tuesday that the spot rate, currently at a record low of 0.1%, could be raised in 2023 instead of 2024.

The RBA’s monetary policy statement released on Friday contained updated inflation expectations.

He now expects core inflation, without volatiles like oil, to rise 2.25% by June 2022.

Westpac, Australia's second-largest bank, now expects house prices to rise in 2021 before slowing down next year and falling in 2023

Westpac, Australia’s second-largest bank, now expects house prices to rise in 2021 before slowing down next year and falling in 2023

As late as August, he expected core inflation to rise only 1.5% by the middle of next year.

Inflation more firmly within the target of two to three percent of the RBA increases the chances of an anticipated rate hike.

High borrowing costs as Australia emerges from Covid restrictions also mean slowing property price growth.

Westpac expected house prices in Sydney to rise 27% in 2021 before slowing significantly by 6% in 2022, followed by a 6% drop in 2023.

He predicts Melbourne’s property values ​​will rise 18% in 2021 before slowing to 8% in 2022 and falling 6% in 2023.

RateCity's research director, Sally Tindall, said ANZ and National Australia Bank are also expected to increase their fixed rates in the coming days after the Reserve Bank said this week it was more concerned about the inflation.

RateCity’s research director Sally Tindall said the ANZ and National Australia Bank are also expected to increase their fixed rates in the coming days after the Reserve Bank said this week it was more concerned about the ‘inflation.

Across Australia, house prices are expected to rise 22% in 2021 before slowing to 8% in 2022 and falling 5% in 2023.

A stronger economy usually coincides with inflationary pressures and therefore rising interest rates.

The Reserve Bank now expects unemployment to drop from 4.6% in September to 4% in June 2023 for the first time since August 2008.

Australian wages have only grown 1.7 percent in the last fiscal year, but the RBA now expects pay levels to increase 3 percent on average over the long term by the end of 2023 for the first time in a decade.

CommSec chief economist Craig James said a faster rate of vaccination created a new problem – inflation.

“In light of rapid vaccination rates across Australia and the reopening of the south-eastern part of the country, the RBA has revised upwards forecasts for economic growth and inflation and downgraded expectations for unemployment rate, ”he said.

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About Robert Valdivia

Robert Valdivia

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