Higher interest rates, poor affordability leading to ‘hostage housing’

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Westpac economists believe the future of the housing market will effectively become “hostage” to broader economic outcomes.

Housing sentiment points to declining turnover through the first half of this year, showing a “clearer” sign that the housing market is slowing, according to Westpac’s February 2022 Housing Pulse.

With mortgage rates already rising and a rise in RBA cash rates forecast for 2022, a housing “correction” is forecast for 2023 and 2024.

Calling the current market the “calm before the storm”, Westpac economists said the new rate outlook – influenced by inflation and labor market challenges – is expected to ripple through all Australian property markets.

Another factor weighing on housing markets is the “deterioration” of affordability, which is affecting buyer sentiment, but interest rate considerations are “not really having an impact yet”.

Real estate turnover showed a “very strong” rebound after the Delta shutdowns, but has seen a “slight decline” since the Omicron outbreak late last year.

Nationally, prices are up 2.5% since November 2021 – a further decline from a peak of 7.1% in May 2021 – but annual gains remain “impressive” at 21.1%.

The Housing Pulse report shows that housing sentiment was largely unaffected – apart from a slight and brief loss of confidence around employment – with the dominant themes continuing to be around high prices and in rising real estate and stretched affordability.

According to Westpac economists, the “shock” of a rate hike will impact all markets over the next few years.

They said housing was becoming ‘hostage’ to the economy, with the outlook relying heavily on how well policymakers – particularly the Reserve Bank of Australia – get Australia through these ‘threat’ challenges.

Which states are the most sensitive to rising interest rates?

Westpac economists said state trends showed “further divergence”, with individual states falling into three distinct groups – most sensitive, least sensitive and least sensitive to affordability pressures and higher mortgage rates. .

They called NSW and Victoria more susceptible, with lower property turnover, high rental vacancy rates in cities and a lack of immigration weighing heavily.

WA and Tasmania are “less sensitive”, thanks to slightly better accessibility than more sensitive states, fewer covid impacts and a “tight” supply-demand balance with lower vacancy rates.

SA and Queensland are labeled as the least sensitive, with strong price momentum and a “super tight” supply-demand ratio, and high turnover.

In Brisbane, house prices have risen by just under 30% over the past year, with December posting a “mezzling” gain of 8.5%.


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