CBA’s head of Australian economics, Gareth Aird, explains below why Australian dwelling values will fall another 6%, assuming the Reserve Bank of Australia (RBA) only hikes the cash rate one more time by 0.25% next week.
However, if the RBA continues to tighten thereafter, as many other economists expect, then CBA will downwardly revise its call on Australian house prices.
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The historical lags between changes in the cash rate and the impact on home prices have shortened over the past five years. The current RBA tightening cycle is a case in point. The peak in home prices nationally was in April 2022. Dwelling prices began their descent as soon as the RBA commenced normalising the cash rate the following month in May.
The rapid pace of RBA tightening has had an almost immediate impact on the demand for credit and by extension home prices (see below chart). The upshot is that national dwelling prices are currently falling at a swift pace. That picture is not anticipated to change in the near term as the RBA is widely expected to lift the cash rate next week (we and the consensus of economists expect the RBA to raise the cash rate by 25bp at the February Board meeting).
The RBA does not target dwelling prices and they have made that explicitly clear. But home prices cannot be divorced from the broader economy and changes in home prices influence the economic outlook. Indeed they are a forward looking indicator (changes in home prices impact wealth, consumer confidence, spending decisions and employment). Housing turnover also impacts spending as turnover and consumption are positively correlated. More turnover in the housing market means more spending on household goods, all else equal. The reverse is also true. The RBA will be monitoring activity in the housing market closely for these reasons, particularly in the context of yesterday’s reported big 3.9% fall in retail trade over December.
In June 2022 we forecast national home prices to fall ~15% peak to trough in this cycle. That forecast has remained unchanged since then, albeit in August 2022 we tweaked the timing a little for the trough to be reached in mid-2023. We have not modified our forecast since then.
Given our expectation for just one further 25bp rate hike we leave our forecast for home prices to fall ~15% peak to trough in this cycle unchanged. If the RBA, however, takes the cash rate higher than we anticipate we will downwardly revise our call on home prices (see below for our forecasts by capital city).
Our narrative is quite simple on the housing front. RBA policy decisions from here will drive the demand for credit, which in turn will influence home price outcomes. Dwelling prices will continue to slide in the short run, but if the RBA takes the cash rate lower in late 2023 as per our forecast then home prices are likely to rise. We expect the Sydney and Melbourne housing markets to be the most responsive initially to RBA rate cuts given they were the first to enter their correction phase.
