Westpac: House prices to rebound by 15% in coming years

^{Photo by Marcus Lenk on Unsplash}

Westpac has forecast a 5% fall in house prices through to late 2021 before a 15% surge in the following two years.

Initially, the big four bank had forecast a 10% fall in prices from the April 2020 peak through to June next year, and an increase of just 4% per annum over the next two years. 

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Westpac economists Bill Evans and Matthew Hassan said low interest rates and a milder than expected recession had caused renewed optimism, but Melbourne would lag behind the rest of the country in their recovery. 

"We now expect many capital city markets to be more resilient with a national fall of 5% between April and June next year, distributed between: Melbourne (–12%); Sydney (–5%); Brisbane (–2%); Perth (flat); and Adelaide (2%)," they said.

"Of most importance is that we are much more optimistic about the pace of price appreciation over the following two years with a total expected increase of around 15%.

"For the near term, our revised view means prices nationally are now only expected to fall a further 2.3% out to June next year (prices having already declined 2.7% since April)." 

Westpac forecast prices stabilising due to a substantial boost from lower interest rates, particularly low fixed rates. 

Over the last year, the average discounted owner-occupier home loan has declined by 60 basis points to 3.65% p.a, and the average three-year fixed home loan has fallen by 106 basis points to 2.35% p.a. 

"Borrowers have been drawn to the lower fixed rates on the reasonable assumption that there is little to lose," Mr Evans and Mr Hassan said.

"Further significant reductions in the overnight cash rate, which traditionally impacts variable mortgage rates, are unlikely."

Westpac also forecast a stronger bounceback in GDP, as COVID disruptions have been briefer and milder than expected. 

Melbourne's second wave also appears to have been less severe than previously thought. 

Sustained upswing 

Westpac said the 15% surge in house prices would be accelerated by record low rates and freely available credit. 

The focus on economic recovery, rather than dropping the unemployment rate (which Westpac forecast to be above 7% in 2023), will be a constructive environment for the housing market. 

"We expect price increases over that 2021–23 period of 15% – around 7.5% per year," Mr Evans and Mr Hassan said.

"These increases are likely to be distributed as: Sydney (14%); Melbourne (12%); Brisbane (20%); Perth (18%); and Adelaide (10%).

"On the basis of those increases we would see affordability modestly worse than long run averages for the nation as a whole, with the advantage enjoyed by the smaller states diminishing."

Uncertainty around loan deferrals 

Westpac economists said loan deferrals posed the greatest uncertainty to dwelling prices.

"The key question here is around the scale and intensity of selling pressure as continued financial distress leads some borrowers into ‘urgent sale’ situations," they said.

"To get a sense of scale, nationally there are about 410,000 properties sold each year (4–5% of all dwellings).

"If 10% of loans currently in deferral wind up on the market, that would see 60,000 ‘urgent’ sales accounting for 15% of all turnover – likely enough to shift prices, particularly in areas where there are higher concentrations of these sales and demand is softer."

Westpac forecasted borrowers in stress would be carefully managed by lenders, and there would be widespread loan restructuring to avoid significant market disruption. 

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