House prices to rise by 16 per cent over 2021 and 2022: CBA forecast

Australia is on the “cusp of a housing boom”, according to the Commonwealth Bank, which has forecast house prices will skyrocket by a massive 16 per cent over the next two years.

An economics issues paper by the bank’s head of Australian economics, Gareth Aird, predicted national house prices would rise 9 per cent rise in 2021 and a further 7 per cent in 2022.

While Sydney and Melbourne are tipped to rise by 7.5 per cent and 7 per cent in 2021, respectively, it’s price growth outside of the country’s two largest capitals that is expected to really soar.

Darwin is predicted to rise by 12 per cent by the end of this year, Perth by 10 per cent, Brisbane by 9.5 per cent and Hobart, Adelaide and Canberra all by 9 per cent.

It’s a stunning turnaround from the dire predictions made during the pandemic’s early days last year, which Mr Aird admitted had taken many in the industry by surprise.

“The negative impact that COVID-19 had on Australian property prices turned out to be much more muted than almost any forecaster expected, us included,” he wrote.

“We were earlier than most, however, to recognise this and revised our call in September 2020 to look for a smaller peak-to-trough fall and a decent lift in prices over 2021.

“But even then, the rapid growth in new lending over the second half of 2020 was stronger than we anticipated. The increase in new lending is now feeing into higher prices for bricks and mortar.”

It’s a trend that CBA expects will continue through 2021 and into next year and, despite the fact a housing boom seemed unlikely only a matter of months ago, Mr Aird said: “in many respects, it’s a simple story”.

“New lending has lifted sharply. Dwelling prices are rising briskly in most capital cities. And turnover is up significantly on year ago levels,” he wrote.

“The boom is being driven by record low mortgage rates coupled with a V‑shaped recovery in the labour market.  Borrowing rates, which are the single biggest driver of prices in the short run, remain below the rental yield in most markets across Australia.

“This is an unusual situation and means that property markets across the country need to find an equilibrium. For the bulk of Australia, equilibrium will be achieved via further dwelling price rises.”

A critical assumption underpinning CBA’s forecast is the cash rate remaining at its record low of 0.1 per cent which, Mr Aird pointed out, was in line with RBA forward guidance.

While house prices were tipped to rise 16 per cent over the next two years, apartment growth would be more modest, rising by 9 per cent nationally, the report said.

A string of economists have upgraded their housing price forecasts in recent months, with ANZ ditching its “too pessimistic” prediction of a 10 per cent drop to tip strong growth next year. ANZ expects Sydney prices to rise 8.8 per cent in 2021, Melbourne 7.8 per cent, Brisbane 9.5 per cent and Perth 12 per cent.

NAB group chief economist Alan Oster told Domain last week he expected an increase in property prices of 10 per cent in most capitals, excluding Sydney and Melbourne, which would rise between 7 per cent and 7.5 per cent.

AMP Capital chief economist Shane Oliver predicts home prices will surge by 5 per cent nationally in 2021, but says inner-city unit prices in Melbourne could fall by as much as 5 per cent.

Dr Oliver expects the upward trend to continue into next year, with some capital cities, including Perth and Brisbane, to experience up to 10 per cent growth.

BIS Oxford Economics economist Maree Kilroy said while the house price forecasts looked to be strong, it was important to note these rises would, in part, be offset by the rock-bottom interest rates.

“It might sound strange, but housing affordability has improved. Whilst we talk about prices getting back to pre-pandemic levels, we’ve also had interest rate cuts since then,” she said.

“Houses may be back to being as expensive as they were in 2017 but the environment is completely different to what it was then — the cost of borrowing is far cheaper now.

“It’s not as though house prices are skyrocketing beyond belief.”

Ms Kilroy said the doom-and-gloom predictions made for the housing market last year were off the back of global uncertainty but as Australia began to progress through the pandemic: “We’ve had a clearer vision of the mechanics at work. The households who would be buying a property are not typically the households that have seen the impact of employment like, say, casual employees,” she said.

“They’ve come out better off almost. You can see that through the savings rate that has increased.”