Rising rates see banks turn bleak on property, NAB predicts 20% fall

Rising interest rates banks bleak property Australia 2022
NAB predicts house prices could plunge more than 20% over the next 18 months in Melbourne and Sydney.

For a group with billions of dollars of property-secured home loans in their vaults, Australia’s banks have a remarkably bleak view of the property market over the next few years.

National Australia Bank (ASX: NAB) is perhaps the bleakest of all, predicting that a combination of rising recession fears and interest rates will combine to erase all of the startling property gains recorded during the COVID-19 lockdowns.

NAB predicts falls of 20%

NAB’s prediction that house prices could plunge more than 20% over the next 18 months in Melbourne and Sydney and by 17.7% across the country is by no means the only harbinger of doom.

Commonwealth Bank (ASX: CBA) economists have not gone quite so far but are singing from the same song sheet, with a prediction that national average prices will drop by 14% by 2023.

They have certainly got the direction tight, even if a lot of pundits think they might be wrong about how far the market will drop.

Prices have started falling in all of the major capitals over the past two months.

Prices already falling in the big capital cities

CoreLogic said prices fell 1.6% in Sydney, 1.1% in Melbourne and 0.2% in Hobart while REA’s Prop Track found prices had dropped by 0.4% in Sydney, 0.6% in Melbourne, 0.35% in the ACT and 0.09% in Brisbane.

CoreLogic said property values still managed to rise by 1.3% in Adelaide, 0.9% in Darwin, 0.4% in Perth, 0.3% in Canberra and 0.1% in Brisbane.

However, overall CoreLogic said home values across the country fell 0.6% in June alone.

With the Reserve Bank increasing interest rates in May and June and likely to continue hiking monthly for much of this year, it is certainly hard to see property prices continuing to rise but there are some precedents to suggest the really bleak forecasts from some of the banks could be wide of the mark.

Banks have been very wrong about property prices in recent past

The first is that they have been remarkably wrong with their forecasts in even the recent past, with across-the-board forecasts of double-digit declines through the COVID-19 lockdown period being replaced by price rises of around 25%.

History is also not replete with examples of property price falls of such magnitude in Australia, with the biggest decline from peak to trough in recent times being a 9.9% plunge between December 2017 and June 2019 due to the Global Financial Crisis.

Other factors that mitigate against such a large percentage fall in property prices include a very tight rental market with rising rents, no real oversupply of housing, a fairly strong economy with rising incomes and the resumption of mass migration and foreign students as borders continue to open.

Rising interest rates will increase real “price” of buying

One thing all sides agree on is that rising interest rates certainly do not help housing affordability and with a strong chance of a further 0.5% rise from the Reserve Bank on Tuesday – along with warnings of future rises – the actual overall “price” of buying a house will keep rising even if actual property prices keep falling.

Loan costs will also be rising strongly for those who bought during the pandemic as super-low interest rate fixed loans continue to toll over into either much higher rate fixed loans or higher floating rate loans.

    Join Small Caps News

    Get notified of the latest news, interviews and stock alerts.