Rate rise to squeeze households and keep Canberra property prices heading down

There is more pain on the way for home borrowers after today’s interest rate rise, with higher repayments and the value of their properties set to fall between 8 and 11 per cent by the end of 2023, according to a new forecast.

The Reserve Bank’s 0.25 per cent hike is the ninth in a row and will add about $77 per month in repayments to a $500,000 variable rate owner-occupier mortgage and $116 per month to a $750,000 mortgage, squeezing already tight household budgets.

The cash rate is now at 3.35 per cent, jumping 325 basis points since moving off record lows in May last year in the fastest and largest rate hiking cycle on record.

The PropTrack Property Market Outlook Report’s prediction about falling house prices is based on at least one more 0.25 per cent increase in rates in March and is higher than its previous forecast of falls between 7 and 10 per cent.

The report sees Canberra prices falling more than the national average of between 7 and 10 per cent, and alongside Sydney and Brisbane, the national capital is set to experience some of the biggest price falls across the country.

But Canberra’s price increases in recent years have also been among the highest in the country, the report noting that at the end of 2022, properties were up 36.4 per cent since the start of the pandemic.

PropTrack says prices in Canberra have slipped 5.1 per cent from the peak reached in March 2022, with prices sitting just 2.6 per cent below their December 2021 levels.

It has the median house price at $1 million and the median unit price at $580,000.

The director of economic research at PropTrack, Cameron Kusher, said the latest hike took the cash rate to the highest level since September 2012.

“With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls,” he said.

“Nationally, we are forecasting prices to fall by a further 7 to 10 per cent by the end of this year.”

But he expected interest rates to plateau, with the potential for cuts in late 2023 or early 2024.

“We anticipate these further interest rate rises will push prices lower. However, a lower interest rate peak and earlier than expected interest rate cuts could ease price falls,” he said.

“We’re expecting prices to decline by up to 10 per cent nationally in 2023, with greater falls expected in the larger capital cities.

“Demand for regional properties is also likely to slow and, given prices have seen stronger growth in these areas than within the capital cities, we expect to see price falls in these markets too.”

But the strong labour market and low unemployment, features of Canberra’s economy, would bolster the housing market.

Real Estate Institute ACT president Hannah Gill said the market had already factored in the rate rise and was expecting more.

She said if anything, a further softening of prices could help affordability.

“So I am hoping it will balance out for people who are in the market,” Ms Gill said.

She said that while the rate rise would impact mortgage holders’ cash flows there were built-in buffers and it was not all doom and gloom.

“I don’t think we’re at point yet where we’ll see a mass exodus from the market,” Ms Gill said.

Mr Kusher’s view is more sanguine than other economists who are tipping that the Reserve Bank has another four increases in mind to bring inflation back to the desired 2 to 3 per cent range.

Reserve Bank Governor Philip Lowe said in his statement that the Board expected that further increases in interest rates would be needed over the months ahead to ensure that inflation returned to target.

The pain will be worse for those coming off fixed-rate mortgages and those who bought into the market recently and face the prospect of negative equity.

The Canberra market sputtered back to life after the holiday break, with Zango reporting 96 auctions for the week ending 5 February, although only 56 sold for a clearance rate of 58 per cent.

Big prices are still being reached despite the downturn, with the top result of $2.2 million for 22 Somers Crescent in Forrest. The median result was $852,000.