Westpac’s new forecasts are an eye-opener.
Banks are waking up to a brand new world.
The worst fears for the property market are clearly not coming to pass, and the banks are reassessing the outlook for prices.
Last week, CBA revised their forecasts. They’re now looking for a very tame 5% fall peak-to-trough, and thumping double-digit growth on the other side of that.
Now, Westpac has joined the party, and are predicting prices to boom.
Westpac expects mild (5%) dwelling price correction through to late 2021 to be followed by 15% surge over the next two years.
To date our view has been for a 10% fall in prices nationally from the peak in April 2020 through to June next year. From that point we expected increases of around 4% per annum over the following two years…
We now expect many capital city markets to be more resilient with a national fall of 5% between April and June next year, distributed between: Melbourne (–12%); Sydney (–5%); Brisbane (–2%); Perth (flat); and Adelaide (2%). Of most importance is that we are much more optimistic about the pace of price appreciation over the following two years with a total expected increase of around 15%.
For the near term, our revised view means prices nationally are now only expected to fall a further 2.3% out to June next year (prices having already declined 2.7% since April).
This is a pretty bullish outlook, especially since we’re still in the midst of Covid, and there’s no vaccine on the horizon, and who knows what else 2020 is going to throw at us.
So why the confidence?
Interest rates, mostly.
Substantially lower interest rates are going to have a huge impact on the market. In the long run, nothing else really matters, although Westpac identifies a number of supporting factors.
This recovery will be supported by sustained low rates, which are likely to be even lower than current levels; ongoing support from regulators; substantially improved affordability; sustained fiscal support from both federal and state governments; and a strengthening economic recovery (particularly once a vaccine becomes available, which we expect in 2021).
… Over the last 12 months the average discounted variable mortgage rate for owner occupier loans has declined from 4.25% to 3.65% (–60bps). Of special interest has been the fall in average 3–year fixed mortgage rate which, for owner occupier loans, has moved from 3.41% to 2.35% over the same period.
This is a record 130bps below the discounted variable rate and 190bps below the discounted variable rate a year ago – while the cash rate has only been lowered 75bps, the pick up for the marginal borrower is closer to 200bps if they now opt to fix.
Borrowers have been drawn to the lower fixed rates on the reasonable assumption that there is little to lose. Further significant reductions in the overnight cash rate, which traditionally impacts variable mortgage rates, are unlikely. The Reserve Bank of Australia (RBA) has identified the current 0.25% cash rate as the effective lower bound.
On the other hand, fixed rates may well go lower…
Are you hearing what they’re saying there?
Interest rates have effectively fallen 200bps. That’s massive. That’s guaranteed to light a fire under prices.
Not only that, they could also go further.
No wonder they’re seeing prices boom on the other side of this.
Could be 2021. Could be a bit later.
But interest rates determine house prices.
And they’re currently set to boom.
Oh, for the record, they expect the boom to break down like this:
We expect price increases over that 2021–23 period of 15% – around 7.5% per year.
These increases are likely to be distributed as: Sydney (14%); Melbourne (12%); Brisbane (20%); Perth (18%); and Adelaide (10%).