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CBA forecasts 15% decline in house prices by mid-2023

4 minute read

The bank now believes prices will fall sooner than it previously predicted.

By mid-next year, the Commonwealth Bank (CBA) has predicted that national dwelling prices will have fallen by around 15 per cent from their peak reached in April this year.

CBA said that, while the scale of the decline is consistent with predictions it made in June, the current pace of price falls has been slightly quicker than the bank had anticipated, leading it to forecast that prices will bottom out in mid-2023 rather than later in the year.

CoreLogic’s national Home Value Index moved lower for the third consecutive month in July and CBA indicated that prices are expected to have fallen by a further 1.5 per cent in August to be down 4 per cent from their peak.

This comes after the Reserve Bank (RBA) has raised interest rates by a total of 175 basis points (bps) in recent months, including three consecutive hikes of 50 bps.

“The historical lags between changes in the cash rate and the impact on home prices have shortened over the past five years. The current RBA tightening cycle is a case in point,” said CBA head of Australian economics, Gareth Aird.

“The peak in home prices nationally was in April 2022. Dwelling prices began their descent as soon as the RBA commenced normalising the cash rate the following month in May. 

“The rapid pace of RBA tightening has had an almost immediate impact on the demand for credit and by extension home prices. The upshot is that national dwelling prices are currently falling at a swift pace. That picture is not anticipated to change in the near term as the RBA continues to raise the cash rate.”

According to CBA, Sydney will suffer the largest peak-to-trough decline of 18 per cent, followed by Melbourne and Brisbane, which are both expected to fall by 17 per cent.

Prices in Hobart and Canberra are forecasted to fall 16 per cent from their peaks, along with declines of 12 per cent in Darwin, 11 per cent in Adelaide and 8 per cent in Perth.

“In many parts of Australia, the housing market has swung from FOMO (fear of missing out) in 2021 to FOGI (fear of getting in),” Mr Aird suggested.

“That dynamic of course does not last indefinitely and prices will stabilise and rebound at some stage. But we are not there yet given the RBA is broadly expected to continue to raise the cash rate, which means standard variable mortgage rates have further to lift.”

The bank expects the cash rate will peak at 2.60 per cent, but it acknowledged that this is among the most conservative forecasts at present.

It has also made a non-consensus call for the RBA to cut rates by 50 bps in the second half of 2023, which it said would lead to a modest increase in house prices that is set to begin in Sydney and Melbourne.

“Our view that the RBA will cut the cash rate in H2 2023 is largely based on our estimate of the neutral rate which we put at ~1.50 per cent (~100 bps lower than the RBA’s estimate of 2.50 per cent),” Mr Aird said.

“We expect the cash rate to sit in contractionary territory for around a year, which would generate below trend GDP growth and an increase in the unemployment rate. We expect the inflationary impulse to slow next year and that will allow the RBA to ease policy to support the economy on our forecast profile in H2 2023.”

CBA noted that its forecasts are conditional on the cash rate peaking at 2.60 per cent in late 2022 and said that a larger fall in dwelling prices was to be expected if the RBA continued to lift rates beyond this level.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.