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.
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.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
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*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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