Sydney property prices are expected to drop by up to 20% as rising interest rates exacerbate affordability challenges in one of the world’s most expensive markets. Such an outcome is likely to lead to a nationwide decline.
Australia and New Zealand Banking Group Ltd. Economists forecast that housing in the country’s largest city will fall by one-fifth this year and the next. Bloomberg Intelligence, far from a tight deadline, sees Sydney falling 12-15% in 2022, based on the cash rate climbing to 1.75% from the current 0.85% by December.
Housing is set to be a major casualty of the Reserve Bank’s campaign to remove monetary stimulus as it tries to tackle rapid inflation. The central bank surprised with a 50-basis point hike last week after starting its tightening cycle in May, and sentiment is already falling among Australia’s heavily indebted households, potentially limiting how much the RBA Can go faster and farther.
BI estimates that a Sydney couple’s ability to service a mortgage will decline by more than 20%, based on a model that uses an average net income of $140,700 ($99,000) by the end of 2022. This 80% loan-to-value ratio is also included in the average household expense and bank-lending appraisal rates for mortgages.
“The hike in mortgage rates is now expected to come at a larger and faster pace,” said Adelaide Timbrell, senior economist at ANZ Bank. “Given that the average borrower has a large savings buffer, we expect a reduction in borrowing ability to be the key driver, not a forced sale.”
Sydney is generally a harbinger of trends in Australia’s A$10 trillion residential real estate market. Kieran Davis, chief macro strategist at Koolbah Capital Investments, sees national prices falling 11% for a cumulative decline of 15% in 2023, 13% in 2024, and 30% the following year.
If his predictions come true, it will wipe out the forecast of a 22% increase in home prices last year and an 8% increase this year.
Australia’s median housing price is $752,507, due to heavy borrowing amid low rates, short supply and increased demand in a high-immigration economy. Davis’ predictions are based on money market pricing in a cash rate of 4.25% in 2024. “There is significant uncertainty surrounding the model’s forecasts, but the results suggest a major short-term improvement is in store as the RBA withdraws its emergency policy stimulus,” Davis said.
