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Interest rates: Property price correction could be over within months - The Australian Financial Review

Australia’s sharpest housing market downturn on record could be over within months, with new research predicting house prices are poised stabilise sooner than previously expected.

Australian house prices have fallen by 9.1 per cent since peaking last May, forced lower by the Reserve Bank’s most aggressive interest rate tightening cycle in a generation, according to data from CoreLogic.

House prices posted a modest 0.1 per cent fall in February, according to CoreLogic data released on Wednesday, though experts said the better-than-expected figure was more a “false dawn” than a fundamental shift.

But analysis of auction clearance rates by JPMorgan finds that house prices could stop falling by mid-year. If realised, it would imply a national peak-to-trough price decline of 10 per cent.

Auction clearance rates have picked up so far this year, averaging 64 per cent over the past four weeks compared with 54 per cent in December.

While noting that clearance rates remain depressed by historical standards, the report’s author, Tom Kennedy, said sales volumes have historically held a tight relationship with house prices. Changes in clearance rates lead price growth by about six months, Mr Kennedy said.

“While COVID-related disruptions and RBA tightening have the potential to compromise the reliability of this relationship, the correlation through 2022 remained robust, with prices broadly tracking the path implied by the turnover data,” Mr Kennedy said.

He said the biggest risk to the outlook was the Reserve Bank of Australia overtightening in response to persistently high inflation.

While the RBA has already delivered 325 basis points in interest rate rises since May, economists expect rates to rise even further.

Markets expect the cash rate to peak in September at 4.2 per cent, with the central bank tipped to increase rates by 0.25 percentage points to 3. 6 per cent next week.

Mr Kennedy, who expects the RBA to pause once the cash rate reaches 3.85 per cent, said further increases above 4 per cent would see house prices fall more than expected.

Luxury property hit

Australia’s sharpest property downturn on record has been felt sharply at the top end of the market.

The top 25 per cent of properties by value have experienced a 12.9 per cent price fall since last April, while the cheapest 25 per cent of the market have eked out a 0.7 per cent price gain, according to analysis by the National Australia Bank.

Properties in Sydney, Melbourne and Hobart have led the price falls, while houses in Adelaide, Perth and Darwin are actually more expensive now than they were last year.

UBS chief economist George Tharenou said improvements in auction clearance rates had been historically consistent with stable, or even rising prices.

“February was materially less weak than the prior trend, when prices were falling consistently by [about] 1 per cent month on month since mid-2022,” he said.

However, Mr Tharenou said he expected the housing market to post a 17 to 20 per cent peak-to-trough decline.

“Ongoing RBA rate hikes will further reduce borrowing capacity ahead, especially since APRA reinforced the 3 per cent home loan serviceability test buffer,” he said.

Sentiment weak

Mr Tharenou said measures of housing sentiment, including perceptions of whether it is a good time to buy a dwelling, remained weak.

Jarden chief economist Carlos Cacho expects national house prices to fall by 20 to 25 per cent.

“While the February data may be seen by some as a sign the house price correction is over, we think this is likely just a pause driven by the optimism of December and January that the hiking cycle was almost over,” he said.

Mr Cacho expects at least another three rate rises from the RBA, with the cumulative effect of RBA rate rises to cause a 30 per cent decline in borrowing capacity and prices to fall well into 2023.

Barrenjoey chief economist Jo Masters does not expect house price falls to end any time soon.

“Typically house prices don’t start rising until the RBA cuts rates, and we don’t have any rate cuts until 2024,” Ms Masters said.

“If you are starting to get prices stabilising or you have a month where prices rise, you are likely to bring more sellers into the market. Listings rise, so that means house prices go sideways to down, for a period until you get more balance in the market.”

Westpac senior economist Matthew Hassan said it was far too early for prices to be stabilising, particularly given the prospect of more rate rises in the months ahead.

Mr Hassan expects a peak-to-trough price decline of 16 per cent, with values to fall until the first half of next year.

Michael Read reports from the federal press gallery at Parliament House. He writes on economics, financial services, and politics. He was previously an economist at the Reserve Bank of Australia and at UBS. Connect with Michael on Twitter. Email Michael at michael.read@afr.com.au

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