Will house prices really drop by 10%? Here's what the banks have to say

Some leading banks are forecasting that the widely anticipated hike to the national cash rate could lead to Australian property prices declining by up to 10 per cent by the end of 2022. What would this mean for you and your mortgage?

How could increasing the cash rate lower house prices?

The national cash rate is one of several factors that banks and mortgage lenders use to set their interest rates. The Reserve Bank of Australia (RBA) hasn’t raised the cash rate in over a decade, and in fact dropped it to the record low of 0.10 per cent in November 2020 to help the economy absorb the impact of the COVID-19 pandemic. This led to banks and mortgage lenders dropping many of their home loan interest rates to record lows, though some of these are already to creep upwards once again.

When interest rates are low, mortgage are cheaper, and many Australians can afford to borrow larger sums of money. As these Australians can afford to pay more for properties, average house prices can start to rise.

When the RBA eventually hikes the national cash rate, most mortgage lenders will pass this cost on by increasing the variable interest rates charged on home loans, increasing the cost of mortgage repayments (customers already locked into fixed rate deals will be able to keep paying the same amount of interest for the remainder of their fixed rate term).

Because higher interest rates make mortgage more expensive, Australians may no longer be able to afford to borrow larger sums to buy expensive properties. If buyers start being priced out of the market, average house prices may start falling to meet demand.

Who’s saying property prices will fall by 10 per cent?

In the latest National Australia Bank (NAB) Quarterly Property Survey, NAB group chief economist, Alan Oster, forecast that dwelling prices may increase by 3 per cent over 2022 before beginning to fall sometime in the second half of the year, leaving growth flat by the year’s end. In 2023, a fall of around 10 per cent is expected.  

Looking at specific capital cities, Sydney and Melbourne were forecast to experience the sharpest decline in property values in 2023 of 11.4 per cent, followed by Perth (8.1 per cent) and Brisbane (6.4 per cent).

According to Commonwealth Bank of Australia (CBA) chief executive, Matt Comyn, with the cash rate forecast to rise around August 2022, CBA expects house prices to grow between 4 and 7 per cent by the end of 2022, and to fall by 5 to 10 per cent over the course of 2023.

However, he added that house prices have risen by over 20 per cent over the past year, so the forecast fall “shouldn’t give our customers too much cause for concern”.

What could a fall in property prices mean for you?

If you don’t yet own a property, a fall in house prices could potentially make it a little easier to join the property market, even if it doesn’t completely offset last year’s growth in prices. If your financial situation allows you to afford the higher repayments if interest rates rise, you may not need to borrow as much to afford a property.

If you already own your home or an investment property, a fall in house prices could potentially affect your equity – how much of your property you own outright, and doesn’t have a mortgage on it. Your equity is calculated from the current value of your property, minus the amount still outstanding on the home loan.

This could potentially lead to issues if you were planning on putting the equity in your home to use, such as to refinance your mortgage, to secure a loan on an investment property, or to access a line of credit. If the bank’s valuation of your property finds you have less equity available than you expected, you may not be able to safely borrow as much as you hoped. A worst-case scenario would be ending up in negative equity, where the property’s current value actually falls below the outstanding mortgage balance.

It's important to keep in mind that property is often a long-term investment, and prices may rise and fall over time. And with Australian homeowners reportedly four years ahead on their mortgage repayments on average, you may find you have enough equity available in your property to manage the effect of a fall in property values without too much trouble.

If you’re concerned that a fall in property prices could put you in financial stress, you could consider contacting a mortgage broker to look into your options to refinance or take other steps. And if you end up in serious financial strife, you can contact your lender about their hardship programs, or talk to an independent financial counsellor.

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