House prices 'could fall 10 per cent' as result of official cash rate forecast, economist says

The Reserve Bank’s decision to revise the official cash rate forecast could contribute to house prices falling 5-10 per cent over the next two years, independent economist Tony Alexander says.

The central bank announced on Wednesday that it now sees a need for the rate (OCR) to rise to about 3.4 per cent by late 2024 to bring down inflation.

It had previously been expecting the OCR to peak at about 2.6 per cent, and the new forecast is higher than predicted by banks and economists.

Alexander said a higher OCR would mean higher home loan interest rates and these, as a rule, would mean more restraint on spending in the housing market.

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“I expect the signal they have given today will reinforce the willingness of some buyers to back away over the next couple of year, and increase the willingness of some sellers or investors to maybe sell their property earlier than they were otherwise thinking,” he said.

Prices had already fallen about 2.5 per cent in the past two months and Alexander expected this to continue.

The Reserve Bank’s monetary policy statement backed up Alexander’s view, stating a variety of factors, including higher interest rates, increased home building, low net migration, changes in tax policy and tightened lending were expected to result in house prices falling by about 9 per cent by the middle of 2024.

Alexander did not expect a crash but said a correction was likely, given the “fairly absurd” high prices seen recently.

“But what will happen is people will over-extrapolate the declines. People tend to base their expectations of what will happen on what has most recently happened.”

He said pessimism in the housing market would probably become rife and people would expect higher declines than would eventuate.

Most homeowners would do what they had done in the past – tighten their belts, not sell unless they had to, and wait for property prices to rise again.

How the OCR will affect mortgage rates

The big question on many people’s minds would be how the higher OCR would affect mortgage rates.

Alexander said the easiest thing to do was to look back in time, and the last time the OCR hit the mid-3 per cent range was between July 2014 and May 2015.

Back then the floating rate peaked at 6.7 per cent, the one-year fixed rate peaked at 6 per cent and two-year rates peaked at 6.4 per cent.

“I think people should anticipate exactly what I have said there, if the Reserve Bank takes the cash rate to 3.5 per cent,” he said.

Squirrel Mortgage Brokers managing director John Bolton did not expect rates to go so high and said that in 2015 mortgage rates were influenced by continued hesitancy from the global financial crisis.

He expected most home loan interest rates to be closer to 5 per cent than 6 per cent.

He said people did not need to panic, because the top of the cycle being forecast by the Reserve Bank had already been largely priced in by the banks.

The effect on recent first home buyers

Alexander said the banks had been stress-testing borrowers at interest rates around 3.5 per cent above what they were borrowing at, which meant most would be able to weather the added expense of higher rates.

“What it is going to mean is some pretty serious cutbacks in other areas of spending – travel, clothing, eating out, drinking – those sorts of things.

“That is going to be the bigger impact on recent young buyers, rather than that they are going to be in mortgage stress.”

Alexander said the Reserve Bank’s announcement had the benefit of sending a “scary signal” to businesses that many homeowners would be cutting back on spending, so they would think twice before putting product prices up.

This would have a knock-on effect of keeping inflation down.

Alexander said if he was a buyer looking for his first home right now, he would still join the market but he would take his time and expect a property that better suited his needs than he would have hoped for six months ago.

Investors ‘most at risk’

For Bolton, those more at risk after the Reserve Bank’s forecast were investors – and particularly those who thought they could get ahead by buying two or three properties and those who ran with little or no surplus income.

“They typically have their loans on interest-only, they are facing significantly higher interest rates, so their repayments have effectively doubled.”

Investors were also facing the phase-out of mortgage deductibility and they would typically be more highly leveraged.

“I don’t think that is going to impact tomorrow but increasingly over the next year or two it is going to get harder and harder for property investors.”

Bolton said house prices could fall but with inflation running so high and wages likely to increase as a result, even stagnant house prices would effectively mean home values were falling.

Job market will support housing market

Alexander said the low unemployment rate would stop any sudden serious falls.

Bolton agreed, saying prices fell dramatically when homeowners were under pressure to sell but that was unlikely while most were in jobs.

The monetary policy statement predicted unemployment to rise gradually, starting in the second quarter, with rates expected to reach pre-Covid levels by 2024.