HOME OPEN: Housing boom runs out of steam

Matthew Hassan
08:00am February 21 2022

Westpac senior economist Matthew Hassan says the days of Australia's housing boom are numbered. (Josh Wall) 

Given the recent pull-forward in our interest rate forecasts, we now anticipate the correction in Australia's residential property markets to begin earlier than expected. 

Dwelling prices are likely to flatten by May – rather than the second half of the year as we’d previously forecast – and start to fall in the December quarter. 

From peak-to-trough, we expect house prices to decline by 14 per cent from late 2022 through to the end of 2024.

What’s driving the correction to loom closer? 

It comes off the back of recent significant economic shifts – including surging inflation and tighter than expected labour market conditions – that led us to firm up our view that the interest rate tightening cycle will begin in August this year, despite commentary from the Reserve Bank of Australia that it won’t move till next year. 

We expect a first rate hike of 15 basis points in that month, followed by a further hike of 25 basis points in October and further increases carrying through most of 2023 and 2024. 

As consumers are bracing for the interest rate hikes, there's already a chill running through markets, and the correction should be underway by the end of the year. 

While a 14 per cent housing price decline sounds aggressive, it’s a drawn-out correction that’s on par with historical capital city market corrections, rather than the very sharp correction we saw in 2018. 

After a 2 per cent fall in prices in the December quarter as the effect of the first rate hikes kicks in, we expect a further 7 per cent fall over the course of 2023 (slightly more than the 5 per cent previously forecast); and another drop of 5 per cent in 2024.  

These expectations may be starting to impact consumers' assessments of the housing market outlook, as they become less bullish on the outlook for house prices, according to the most recent Westpac-Melbourne Institute consumer sentiment survey. 

As we get closer to the Reserve Bank commencing its tightening cycle, the more we'll see signals of the market really slowing and tipping over into correction phase. 

The days are numbered for Australia's housing boom. 

For more head to ‘Dwelling prices to decline’ report on Westpac IQ.

Matthew Hassan

Matthew is a senior economist with Westpac. His specific areas of expertise are housing markets and the Australian consumer sector. Matthew’s research has been instrumental in shaping Westpac’s views on the Australian economy, including recent calls on official interest rates. His research has provided important insights into housing market developments and the behaviours of the Australian consumer. He is the author of Westpac’s monthly Red Book report, regards as essential reading on the consumer sector. Before joining the Westpac team in 2007, Matthew held senior positions with leading economic consultancies in Australia and New Zealand.

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