Westpac: House prices will fall 15%

Westpac Bank has increased the amount it expects house prices to fall over the next two years, to 15%.

In its latest property market update, the bank’s economists said that while they had correctly identified that house prices would fall as mortgage rates rose, those rates had now gone beyond what had been expected. ‘‘House prices have been falling since the end of 2021 and at a fairly rapid pace compared with history (considering that any drop in prices at all is a rare occurrence).

‘‘Higher mortgage rates, and in particular the sharp rise in fixedterm rates that began around September last year, are having the impact we expected on what buyers are willing to pay for a property.’’

House prices were down 4.7% in the four months to March.

Westpac acting chief economist Michael Gordon said the bank had been consistent in its prediction of an official cash rate (OCR) peak of 3% over the next couple of years.

But by February, interest rate markets were already factoring that in and by May had shifted to appear to expect a peak of more than 4%.

‘‘Whether that is a genuinely held view about local economic conditions or whether we are just being dragged around by overseas markets, is a moot point. The fact is that it is the market interest rates that determine banks’ funding costs and hence what they charge to borrowers.’’

Gordon said that while the market was ‘‘overcooking it’’ in terms of what was expected from the OCR, it was likely to continue to do so until given a reason to think otherwise.

‘‘That reason will be a substan

Westpac Bank

tial drop in house prices, making it something of a self-defeating prophecy.’’

Gordon said the bank’s economists still thought fixed-term mortgages were closer to the peak than the trough of this cycle but shorter fixed terms in particular still had some way to rise.

Initially, the bank had expected two-year rates to top out at just under 5% but they were already beyond that.

‘‘There is so much tightening already baked into the market that even if the Reserve Bank did lift the OCR all the way to 4%, fixed-term mortgage rates won’t need to move anywhere near as far.’’

But the higher interest rates would mean more price weakness, he said.

‘‘Accordingly, we have revised our view of how far house prices will need to adjust to bring the market more into balance. We previously expected a 10% peak-totrough fall in prices over this year and the next; we now expect a total drop of 15%. We have also frontloaded the fall, with a 10% drop in 2022 and a further 5% in 2023.

‘‘A 15% drop seems very large compared with history but, to put it in context, it would only take average prices back to where they were at the start of 2021. That just illustrates the ferocity of the rise in house prices during what turned out to be a brief period of super-low interest rates.’’

The Westpac economists said that in the absence of distressed sales, which were not expected to be a factor, property owners would generally not sell at a loss if they did not have to.

‘‘This means that some of the adjustment will come in the form of lower turnover instead of lower prices.’’

‘‘Market interest rates determine banks’ funding costs and hence what they charge to borrowers.’’ Michael Gordon