‘Fear factor’: real estate outlook worsens as banks forecast record price decline

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Australians must brace for the worst housing correction ever as rising interest rates and recession fears strangle the property market.

That is the latest warning from the big banks, who are now predicting that most of the gains made during the pandemic house price boom be erased over the next two years.

National Australia Bank (NAB) said this week that house prices in Melbourne and Sydney could fall by more than 20 percent in the next 18 months, and by 17.7 percent nationwide.

Commonwealth Bank economists, meanwhile, have predicted that national average prices will fall by 14 percent by 2023.

fears about rising interest rates and the inflation they need to fight are driving the bleak outlook, with buyers expected to exit the market in response to higher borrowing costs.

Over the past two months, prices in major capitals have already started to fall: the latest data released on Friday showed a decrease of 0.8 percent in the capital real estate prices in June.

But some analysts disagree with forecasts from Australia’s largest lenders, suggesting that the fundamentals underlying the housing market are still strong and prices may not fall as much as feared.

“We are in a period where the fear factor is driving the markets,” veteran housing economist Andrew Wilson told IPS The new daily newspaper.

“But we’re going to get to a point where the value proposition in the market pulls buyers back.”

Real estate prospects sour

The big banks’ forecasts are so bleak that they imply a recession is imminent.

That’s because Australia’s biggest-ever peak-to-depth drop in house prices totaled 9.9 percent between December 2017 and June 2019.

There was no recession then, but today NAB predicts that the price will fall almost double.

Timothy Hibbert, head of property and building forecasting at BIS Oxford Economics, said such a large drop in property prices would likely trigger a recession, or be the result of a recession.

“It’s hard to see it happen without a recession,” he said of NAB’s forecast.

Mr. Hibbert disagrees with NAB, predicting that real estate price declines will be limited to about 9 percent nationally by 2023.

He said this matches the historic precedent for Australia’s housing crisis.

“We are assuming a position of extreme tightness in the rental market, and an overall undersupply of housing,” said Mr Hibbert.

“We don’t have a huge oversupply of housing that can facilitate higher [price] fall.”

NAB chief economist Alan Oster explained the bank’s outlook on Thursday, saying it was based on the upward trajectory for official interest rates.

“In a historical context, this would be a very large decline in nominal terms, but is expected to occur alongside a relatively strong rise in interest rates and comes after a 25 percent rise in prices from the pandemic alone,” he said.

“We don’t expect a disorderly price decline with revaluation due to higher interest rates and lower borrowing capacity.”

Self-fulfilling prophecy

dr. Wilson — who predicts a price drop of 8 to 9 percent — said such bleak forecasts for the real estate market risk becoming a self-fulfilling prophecy.

dr. Wilson said fear of the future prompts buyers and sellers to “sit on their hands” during the winter, causing prices to fall faster than usual.

But he predicts that strong market fundamentals will soon attract buyers again.

“The economy remains strong, incomes are rising, the wealth effect is still quite positive – and borders are opening, resuming mass migration,” he said.

“There will be a gradual negative fever, but then the value opportunities will start to realign the market.”

dr. Wilson said the main factor weighing on the real estate market is the future of interest rates, with the RBA widely forecast to see another 0.5 percentage point increase next week.


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