For some time the Westpac Economics Team has been forecasting a modest resurgence of house price inflation this year, before the market turns more decisively negative later next year. Despite our near-term bullishness, we anticipate a period of falling house prices later in the decade.
One rationale for such a multifaceted forecast is net migration. In the short run, net migration is set to hit an all- time high of 50,000 people per annum. Our research indicates that net migration usually plays only a relatively small role in determining house prices. But sheer weight of numbers means that even that small role will translate into a reasonable boost to house prices over the year ahead.
At present the Investment Value is sitting at a roughly neutral level, meaning financial factors are applying no particular directional pressure to the market. The Investment Value currently provides no counter-argument to the notion of rising house prices, in the short term at least.
But that is set to change. Over the coming years rising mortgage rates will become a major impediment to the housing market. If the two-year fixed mortgage rate rises to 7% as we expect, the Investment Value would drop well below the current level of house prices – indicating that prices could fall.
Fair enough, I guess. Although I am perplexed why Westpac believes that the Australian economy will recover from 2015, given the likely steepening of the mining investment cliff, the inevitable slowing in housing and the shuttering of the automotive industry…