Westpac has released its Housing Pulse for May, which declares that Australia’s housing market is now “entering a broad–based correction phase that will be largely shaped by the speed and extent of the interest rate tightening”.
Home buyer sentiment has collapsed to its lowest level since the Global Financial Crisis in 2008, with Westpac tipping “an earlier and sharper correction for dwelling prices” of around 11% on the back of a quick rise in the cash rate “to a peak of 2.25% by May 2023 and holding at this level through 2023 and 2024”:
Australia’s housing markets have turned, showing all the hallmarks of a correction phase. Turnover is down 23% nationally from last year’s highs…
Housing–related sentiment has continued to sour… Nationally, the Westpac Melbourne Institute ‘time to buy a dwelling’ index has fallen a further 8.7% since Feb to 77.5 in May. The new cycle low is the weakest read since the GFC fourteen years ago, worse than 82.1 registered when the COVID pandemic first hit in 2020, the 90 recorded during the 2017–18 price correction and the 88.2 recorded at the peak of the 2009–10 interest rate tightening cycle. The 41% drop since the Nov 2020’s is the second steepest 18mth decline since beginning of the series in the mid–1970s, only eclipsed by the collapse in 1988–89. The long run avg is 120…
Price expectations remain positive on net but have been pared back quickly to be a touch below their long run average level…
The more timely data on auction markets, available weekly to mid–May, point to a further weakening after the RBA’s first 25bp rate hike. Clearance rates have dropped through long run averages in both Sydney and Melbourne. Pre–auction withdrawals have also jumped, the overall picture consistent with a slight pick–up in the pace of price declines…
We now expect the RBA to lift the cash rate to 2.25% by May 2023, a much earlier and more aggressive tightening than we envisaged back in Feb… Prices are now forecast to decline 2% over calendar 2022 with a further 8% fall in 2023 and 1% decline in 2024…
Westpac’s forecast 11% house price fall looks too optimistic should the cash rate rise to 2.25% by May 2023.
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If such an increase in the cash rate was passed on to mortgage holders, it would deliver an 80% increase in mortgage interest repayments, which would be the sharpest rise in Australia’s history.
It is hard to believe that dwelling values nationally would fall only 11% under Westpac’s interest rate scenario.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
