Australia’s biggest bank – the CBA – has just upgraded its housing market forecast, joining the long line of economists that have done a 180° about-face.
CBA economists think Australia’s housing market is “on the cusp of a boom”, saying that surging momentum in the property market and leading indicators pointed to strong price rises.
They are forecasting that dwelling prices will rise 8% in 2021 and 6% in 2022, with house prices rising 16% in that time and unit prices by 9%, continuing the disparity in these two segments of our property markets.
If Sydney and Melbourne home values grow by 12 per cent in the next two years that would mean Sydney’s median price would jump to around $1.2 million, and Melbourne’s would increase to $920,000, an increase of $160,000 in Sydney and $110,000 in Melbourne.
Of course not all properties will increase at the average rate – some will outperform the averages while others will languish – but that’s how averages work isn’t it?
CBA’s house price forecasts in underpinned by no change in the cash rate for the next two years, which is likely considering the Reserve Bank stated that they were unlikely to change their interest rate for three years.
The main risks to the bank’s forecast property boom were:
- a significant outbreak of COVID followed by large-scale lockdowns,
- a hike in interest rates, and
- the re-introduction of macro-prudential measures to slow the rate of lending.
The bank’s head of Australian economics, Gareth Aird wrote:
“We do, however, factor in a modest increase in fixed rate mortgages, which will rise if the RBA removes or raises its target yield on the 3 year Australian Government bond, as we expect in the second half of 2021.
At this stage we consider the reintroduction of macro-prudential measures to be a relatively low risk in 2021.
However, if new lending accelerated too quickly, particularly to investors, there is a risk that the Australian Prudential Regulatory Authority (APRA) could reintroduce macro-prudential measures to slow things as they did in 2017.
History shows that prices can rise very quickly when the housing market is on a roll. Indeed it may turn out to be the case that the growth profile for price outcomes over the next two years ends up more front loaded than our current projections.”
What an about-face…
It’s a stunning turnaround from the dire predictions made during the pandemic’s early days last year.
At the beginning of the pandemic, CBA economists forecast an 11 per cent fall in house prices over three years under their ‘best case’ pandemic scenario.
But it’s the bank’s worst-case scenario of a prolonged downturn that had factored in the risk of a 30 per cent plus fall in prices, which received a lot of publicity.
Now it’s understandable that in March last year no one really knew what was ahead, and clearly unprecedented government support as well as fiscal and monetary stimulus underpinned our property markets, supported jobs, and allowed us to have a short sharp recession with a quick rebound.
The bank’s head of Australian economics, Gareth Aird admitted had that this turnaround had taken many in the industry by surprise saying:
“The negative impact that COVID-19 had on Australian property prices turned out to be much more muted than almost any forecaster expected, us included,” he wrote.
“We were earlier than most, however, to recognise this and revised our call in September 2020 to look for a smaller peak-to-trough fall and a decent lift in prices over 2021.
Mr. Aird wrote:
“In many respects, it’s a simple story.
New lending has lifted sharply.
Dwelling prices are rising briskly in most capital cities.
And turnover is up significantly on year ago levels.
The boom is being driven by record low mortgage rates coupled with a V‑shaped recovery in the labour market.
Borrowing rates, which are the single biggest driver of prices in the short run, remain below the rental yield in most markets across Australia.
This is an unusual situation and means that property markets across the country need to find an equilibrium.
For the bulk of Australia, equilibrium will be achieved via further dwelling price rises.”