Double-digit drops in capital city property prices likely after RBA rate hikes

Property prices in most Australian cities are expected to fall by double-digit figures after the Reserve Bank of Australia hit the interest rate brakes harder and faster than earlier forecast, crimping the size of loans households can borrow, economists say.

As borrowing costs have rise, GDP growth has slowed faster than predicted, dragging household consumption lower and accelerating the downturn in average property prices.

The expected price decline would also be a drag on consumer confidence to the extent that household wealth would wilt along with home values. CBA on Thursday cut its forecast growth for the economy to 3.5% from 4.7%, while next year GDP will expand 2.1%, or a full percentage point slower than previously predicted.

CBA also lifted its prediction for headline consumer price inflation to peak at 6.2% later this year from an early maximum pace of 5.75% forecast just a month earlier. The acceleration in inflation, led lately by energy and food prices, was the prime reason for the RBA to ditch its earlier pledge to be patient before starting its rate rise cycle.

Some falls are already under way, with Melbourne posting a slide lasting six months so far and Sydney four.

The last downturn in prices was between mid-2017 to mid-2019, with a slide of almost 10% nationally. For Sydney, the drop was about 15% with Melbourne declining 11%.

The two biggest cities were probably more exposed to larger downward pressure as they faced demographic headwinds from migration to other states. While overseas immigration is starting to pick up, demand will initially be in the rental market, rather than home buying, Lawless said.

Sally Tindall, research director at RateCity, said that demand for housing was already being sapped by the two rate rises as banks reduced the maximum amounts they would lend.

While his bank is yet to predict how home prices will fare in 2024, the bank expects the RBA to start cutting interest rates again as inflation eases by late 2023, helping to stabilise the housing market.

One sector likely to do less well will be the real estate industry itself.