Australia's biggest bank believes the housing market is on the cusp of a boom.
Commonwealth Bank (CBA) forecasts dwelling prices will rise 8% in 2021 and 6% in 2022, with house prices to rise 16% in that time and unit prices by 9%, evidencing the disparity in the sectors.
CBA Head of Australian Economics, Gareth Aird, said surging momentum in the property market and leading indicators pointed to strong price rises.
"New lending has lifted sharply. Dwelling prices are rising briskly in most capital cities. And turnover is up significantly on year ago levels," Mr Aird said.
"Near term indicators of momentum suggest conditions will further strengthen. Auction clearance rates are sitting at levels consistent with double-digit dwelling price growth.
"And both the CBA home buying measure in our Household Spending Intentions series and the house price expectations index from the WBC/MI Consumer Sentiment survey have surged."
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Darwin is forecast to be the strongest capital performer, with values rising 12% this year and 6% next year, followed by Perth and Brisbane.
Sydney and Melbourne are the laggards, rising by only 7.5% and 7% this year respectively, and 5.8% and 5% next year.
CBA capital city dwelling price forecasts
CBA's house price forecasts in underpinned by no change in the cash rate for the next two years, with the Reserve Bank (RBA) stating the rate was unlikely to be changed for three years.
Fixed rates have dipped below 2% for the first time ever in recent months, with many lenders offering such products, but CBA said this may be a temporary trend.
"We do, however, factor in a modest increase in fixed rate mortgages,which will rise if the RBA removes or raises its target yield on the 3 year Australian Government bond, as we expect in the second half of 2021," Mr Aird said.
The main risks to the forecast boom were a significant outbreak of COVID followed by large-scale lockdowns, a hike in interest rates, and re-introduction of macro-prudential measures to slow the rate of lending.
"At this stage we consider the reintroduction of macro-prudential measures to be a relatively low risk in 2021.
"However, if new lending accelerated too quickly, particularly to investors, there is a risk that the Australian Prudential Regulatory Authority (APRA) could reintroduce macro-prudential measures to slow things as they did in 2017."
Meanwhile, a greater rise in prices than forecast could be seen if sustained exuberance was combined with FOMO.
"History shows that prices can rise very quickly when the housing market is on a roll. Indeed it may turn out to be the case that the growth profile for price outcomes over the next two years ends up more front loaded than our current projections."
Central bank needs a "reset"
Mr Aird said with the cash rate at its effective lower bound, it would be incredibly hard for the RBA to raise the rate given the level of household indebtedness.
"This means that when the next negative economic shock arrives we are unlikely to have the interest rate lever available to give households debt relief.
"In addition, we won’t be able to stimulate the interest rate sensitive parts of the economy with more rate cuts."
Mr Aird said the cash rate was all out of rope as a monetary policy tool, leading CBA to believe the central bank may need some sort of reset.
"This leads us to believe that we are inching towards a new paradigm that will involve some form of monetary financing in the future(i.e. a direct transfer of money from the central bank for government to spend).
"It may still be a long time away, but the bottom line is that the system as we know it will need to be reset and the printing press will be part of that reset."
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