The property market is set to suffer a decline in turnover during the first half of this year in response to shifting consumer sentiment, according to a new report from Westpac.
Headlined the “calm before the storm”, Westpac’s latest Housing Pulse report said that the property market boom was now showing clearer signs of slowing down with a broad-based correction phase set to begin later this year in response to the interest rate tightening cycle.
This correction is expected to continue throughout 2023 and 2024 in line with Westpac’s previous predictions of a 14 per cent fall in house prices over the next two and a half years.
Property prices have lifted 2.5 per cent since November last year, down from a peak of 7.1 per cent in the three months to May, while annual gains held strong at 21.1 per cent.
Westpac said that its latest outlook had taken into account inflation and labour market challenges, their effect on interest rates and the subsequent impact on property markets.
“The current picture on markets shows a gentle slowing with turnover still running at relatively high levels amid tight conditions in terms of both on-market supply and rental vacancies,” the bank said.
“Deteriorating affordability has continued to weigh on buyer sentiment but interest rate considerations have yet to really impact.”
The bank identified a divergence between the states as a result of affordability pressures and the likelihood of higher interest rates and said that three distinct groups were emerging.
NSW and Victoria were said to be the most sensitive with price momentum already stalling in both states, while Western Australia and Tasmania were said to be less susceptible to weaknesses after suffering a milder slowdown to date.
Queensland and South Australia were highlighted as the least sensitive states due to accelerated price momentum, tight supply-demand balance and less constrained affordability. However, Westpac warned that no market would be able to escape the impending correction.
“While performances will vary, the common shock of a sustained rise in rates will impact all markets over the next few years,” warned Westpac.
“Housing will in effect become hostage to outcomes across the wider economy with prospects resting heavily on how successfully policymakers, the RBA in particular, guide Australia through these looming challenges.”
Westpac expects that the RBA will begin its tightening cycle in August with the cash rate set to peak at 1.75 per cent in the first half of 2024.
It reiterated that the property market would be “collateral” damage during the RBA’s efforts to keep inflation within its target, due the sector’s high sensitivity to interest rate changes.
“With affordability already stretched in many markets, rate rises will have a direct impact on the borrowing capacity of buyers and their ability and willingness to sustain high prices,” Westpac said.