Biggest house price correction since 1980 to hit, Sydney and Melbourne set to be hardest hit

House prices in Australia could plunge by 20%, with Sydney and Melbourne set to suffer the biggest declines in four decades – as interest rates soar to curb inflation.

Investment bank Jarden fears the biggest fall in the housing market since 1980, with the Reserve Bank of Australia now expecting inflation to hit 7% by the end of 2022 for the first time in 32 years.

Big Australian banks are planning four more RBA rate hikes by Christmas, which could see a borrower with a typical $600,000 owing $582 more each month on their mortgage payments.

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Jarden Australia chief economist Carlos Cacho said inflation was likely to worsen, hitting 6.7% in September, the highest annual rate since the end of 1990.

In this environment, domestic house prices would fall by 15-20% by the end of 2023, as rising interest rates reduce banks’ lending capacity.

“This would be the biggest house price correction since at least 1980, in real and nominal terms,” ​​Cacho said.

He predicted a 5% drop in 2022 followed by a 10-15% drop in 2023, with “faster and bigger” falls in Sydney and Melbourne.

It would be worse than the drop in the early 1990s, after interest rates hit 17.5%, and between 2017 and 2019, after the Australian Prudential Regulation Authority tightened rules on interest-only loans and investors.

Mr Cacho said the situation was dire for the housing market unless there was a “change” in buyer sentiment.

Reserve Bank of Australia Governor Philip Lowe now expects inflation to reach 7% by the end of 2022, reaching a level not seen since the mid-1990s – a year before that a recession does not occur.

Dr Lowe also admitted the cash rate could hit 2.5% next year for the first time since February 2015.

In this scenario, a borrower with an average mortgage of $600,000 would see their monthly mortgage payments jump by $725.

Commonwealth Bank, Australia’s biggest property lender, expects four more rate hikes by Christmas, taking the cash rate to 2.1%.

This would already see a borrower with a $600,000 mortgage paying an additional $582 every month on their mortgage.

Dr Lowe admitted it would be difficult to get inflation back within the central bank’s target, in his first appearance since the RBA this month raised the benchmark rate by half a percentage point .

“Right now it’s 5% and by the end of the year I expect inflation to be at 7%,” he told the ABC 7.30 host. , Leigh Sales, in a rare interview.

“It’s a very high number and we need to be able to get back to 2-3% inflation.

“I am convinced that we can do it, but it will take time.

“With inflation so high and interest rates so low, we thought it was important to take a decisive step to normalize monetary conditions and we did so at the last meeting.”

He said it was reasonable to expect the cash rate to hit 2.5% at some point, but said it would depend on events.

The cash rate now stands at 0.85% – the highest level since October 2019 before the pandemic – after the RBA raised it in back-to-back board meetings in May and June, from a record high of 0.1%.

A rise to 2.5% for the first time since February 2015 would mark the biggest rise in the RBA’s cash rate in a year since 1994.

If the cash rate reached that level, a borrower with an average mortgage of $600,000 would see their monthly repayments jump $725, from $2,384 to $3,109.

This is based on an existing mortgage rate dropping from 2.54% – below the old cash rate of 0.35% until variable rates rise this month – to 4.69%.

As recently as last year the RBA had repeatedly said it would keep the cash rate at 0.1% until 2024 “at the earliest”, but Dr Lowe said that had not never been a promise.

“The economy has not evolved as we expected. It has been much more resilient and inflation has been higher. We thought we had to respond to that,” he said.