Sydney, Melbourne real estate: Fitch credit rating agency predicts 20 per cent fall in house prices

How far Australian house prices are predicted to drop with international credit ratings agency explaining why it’s bracing for double-digit plunge

  •  Fitch Ratings is predicting 17 to 20 per cent fall in Australian house prices 
  •  Based on Reserve Bank interest rates rising to 11-year high of 3.35 per cent 
  •  Credit ratings agency said small number in mortgage stress wouldn’t cope 

Australian house prices are likely to plunge by 20 per cent, an international credit ratings agency has predicted.

Fitch Ratings is predicting the Reserve Bank of Australia will keep raising interest rates into 2023 until they hit an 11-year high of 3.35 per cent – up from a present nine-year high of 2.85 per cent.

As that occurs, the New York-headquartered credit ratings agency expects Australian house prices to plunge by 17 to 20 per cent from their peak in 2022. 

Should that scenario materialise, Sydney‘s median house price would fall by $240,883 to $283,392 from a peak of $1.42million in April this year.

In the worst-case scenario, they would drop to $1.11million, based on CoreLogic data.

Australian house prices are likely to plunge by 20 per cent, an international credit ratings agency says (pictured are houses under construction at Oran Park in Sydney's outer south-west)

Australian house prices are likely to plunge by 20 per cent, an international credit ratings agency says (pictured are houses under construction at Oran Park in Sydney’s outer south-west)

Sydney house prices in November fell by another 1.5 per cent to $1.24million, having this year already fallen by 11.9 per cent in Australia’s worst-affected capital city market.

While Australia has maintained its AAA credit rating, Fitch noted Australians had the highest debt to after-tax income of 190 per cent and would therefore be ‘likely to face pressure from rising debt-servicing burdens’.

Fitch predicted a small proportion of borrowers in mortgage stress would be forced to sell, but noted most Australians with a mortgage would survive by cutting back on their spending.

‘We expect rising rates to dampen consumption, rather than pose financial stability risks, though a small share of households could face stress,’ it said.

Fitch said only a small number of borrowers would owe their bank more than their home was worth because house prices were still above pre-pandemic levels of early 2020.

‘Only a small share of borrowers are likely to fall into negative equity as we forecast prices to remain above pre-pandemic levels and recover modestly in 2024,’ it said.

But this could change should unemployment rise sharply from October’s 48-year low of 3.4 per cent as interest rate rises caused a sharp economic downturn.

‘A sharper housing correction, along with a labour market shock well above our baseline, would increase financial sector pressure,’ Fitch said.

Fitch Ratings is predicting the Reserve Bank of Australia will keep raising interest rates into 2023 until they hit an 11-year high of 3.35 per cent - up from a present nine-year high of 2.85 per cent (pictured is an auctioneer at Paddington in Sydney last year)

Fitch Ratings is predicting the Reserve Bank of Australia will keep raising interest rates into 2023 until they hit an 11-year high of 3.35 per cent – up from a present nine-year high of 2.85 per cent (pictured is an auctioneer at Paddington in Sydney last year)

House prices keep falling

SYDNEY: Down 1.5 per cent in November and down 11.9 per cent in 2022 to $1,243,126

MELBOURNE: Down 1 per cent in November and down 8.1 per cent in 2022 to $915,005

BRISBANE: Down 2.2 per cent in November and down 0.8 per cent in 2022 to $798,552

ADELAIDE: Down 0.4 per cent in November but up 10.2 per cent in 2022 to $702,392

PERTH: Up 0.1 per cent in November and up 3.7 per cent in 2022 to $585,989

HOBART: Down 2 per cent in November and down 4.7 per cent in 2022 to $740,100

DARWIN: Down 0.3 per cent but up 5.2 per cent in 2022 to $588,972

CANBERRA: Down 1.3 per cent and down 3.5 per cent in 2022 to $987,450

Source: CoreLogic median house price data for November 2022

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Banks are required to assess a potential borrower’s ability to cope with a three percentage point increase in variable mortgage rates under Australian Prudential Regulation Authority rules.

‘Prudent mortgage serviceability buffers instituted by regulators mean most households have been assessed at rates around prevailing levels,’ Fitch said.

Borrowers since May have been dealt with 2.75 percentage points of rate rises and Fitch, like most economists, is expecting another 0.25 percentage point increase on Tuesday.

That would take the RBA cash rate to a 10-year high of 3.1 per cent, with borrowers enduring three percentage points of rate increases since the era of the record-low 0.1 per cent cash rate ended seven months ago. 

Almost two-thirds or 65 per cent of Australian borrowers have a variable mortgage.

Many Australians had also fixed their mortgages in 2020 and 2021 at just 2 per cent when the RBA cash rate was still at 0.1 per cent.

But Fitch is expecting two-thirds of those fixed-rate loan periods to expire by the end of 2023. 

When it came to inflation, Fitch was expecting it to peak at 7.8 per cent in 2022 and decline to 3.5 per cent by 2023.

They are certainly more optimistic than the Reserve Bank of Australia, which is expecting headline inflation to peak at 8 per cent in late 2022 and fall to 4.75 per cent by the end of next year.

The RBA is expecting inflation to remain above its 2 to 3 per cent target until 2025.

Inflation in the year to September hit a 32-year high of 7.3 per cent but the annual pace declined to 6.9 per cent in October in the new Australian Bureau of Statistics monthly series.

Source

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