air conditioner house
House prices are expected to cool this year. Image – Canva.
  • Fading effects of record low interest rates and strong income support on housing demand
  • Housing supply expected to rise in 2022, leaving buyers with greater choice
  • Rental supply predicted to tighten with international borders set to open in February

Following a house price surge of 22.1% in 2021, the fastest growth since 1988, first home buyers are in hope of market reprieve in 2022.

The question is, are we to expect house prices to decline this year?

What to expect this year

While Australia’s housing boom has largely plateaued, significant obstacles ahead suggest otherwise.

House prices are expected to rise in 2022 at a slower rate than 2021 according to leading property data providers and major banks, with growth projected at 5-6% (CoreLogic), 8% (Westpac), 6% (ANZ), and 4.9% (NAB).

This forecasted slowdown is underpinned by the fading effects of record low interest rates and strong income support during the pandemic, along with tighter lending standards, reducing buyer’s leverage.

In addition, affordability constraints triggered by the disparity between wage and house price growth have also placed a downward pressure on housing demand and subsequent forecasted price growth in 2022.

These demand-driven factors have already seen the Australian housing market cool off in December 2021, rising 1% nationally, compared to 1.3% in November and a peak of 2.8% earlier last year.

What other factors will differentiate the 2022 housing market?

The characterisation of the fierce 2021 market has been underpinned by the disequilibrium of housing demand exceeding supply.

However, the buying competition and fear-of-missing-out (FOMO) sentiment that defined the 2021 market is expected to reduce in 2022 due to an expected increase in housing availability.

Appraisals that determine the number of homeowners considering listing their properties for sale have already elevated this year, meaning greater choice for buyers and ultimately placing a downward pressure on price growth this year.

Conversely, rental supply is expected to tighten with international borders set to open in February 2022.

With the return of student and skilled labour immigration, apartments sold and rented within metropolitan areas will increase, serving a purpose to fill vacant apartments which were sitting idle during the pandemic.

However, it will ultimately tighten rental availability, particularly for regions such as inner Melbourne and Sydney’s city and east, which historically have a high level of overseas migration and student population.

Beyond 2022

While the average variable interest rate on mortgage loans has fallen 0.25 percent from a year ago, fixed interest rates are creeping up, an indication that the Reserve Bank of Australia (RBA) are expected to increase the cash rate in the upcoming 12 months.

This is leaving loan holders concerned about defaulting on mortgage repayments.

Speculation regarding timing of a cash rate increase from an all-time low of 0.1% is determined by whether expansionary policy will increase inflation to sustainably sit within a 2-3% target range.

In February 2022, the bank will review its $4 billion bond- buying program and cash rate in April 2023 in reflection of this and determine whether adjustments are required accordingly.

Any monetary tightening measures will place downward pressure on housing prices in 2023.

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