House prices to spike by 17%: ANZ

In their latest economic insight, Housing: powering ahead, ANZ senior economist Felicity Emmett and economist Adelaide Timbrell said that “ultra-low” interest rates are supporting the housing market, while the combination of strong demand and low supply is pushing prices significantly higher.

They also said that the impact of low interest rates has “more than offset” the headwinds from higher unemployment and very low population growth during the coronavirus pandemic, which occurred due to social distancing restrictions and border closures.

As such, the economists said that they expect house prices to rise by a “sharp” 17 per cent at the national level across the capital cities in 2021.

Across the capital cities, ANZ expects Sydney and Perth to be the best performers, with 19 per cent growth, followed by Hobart (18 per cent), Melbourne and Brisbane (16 per cent), and Adelaide (13 per cent).

Further, ANZ expects housing construction to grow by 12 per cent in 2021, with much of the growth concentrated in house building and renovations.

However, it has predicted a decline in activity in 2022 as bringing forward construction would “inevitably” create an activities shortfall once the HomeBuilder stimulus is withdrawn, Ms Emmett said.

But this decline in activity next year is expected to be modest amid the low interest rates as well as the remaining government support measures, including the First Home Loan Deposit Scheme (FHLDS), and the first home owner grants being offered by state governments, according to Ms Emmett.

Macro-prudential policies to ‘bite’ into growth

However, Ms Emmett warned that the sharp rises in house prices, rising debt and a “likely easing in lending standards” could lead to the Australian Prudential Regulation Authority (APRA) intervening, with macro-prudential tightening later in 2021, which could slow down house price growth in 2022.

She added that the major bank is expecting house prices to grow by a lower 6 per cent in 2022 “as macro-prudential policies bite”.

Ms Emmett said the exact nature of the measures would likely depend on how the market develops over the next six months or so.

“We expect macro-prudential restrictions will be introduced later this year,” Ms Emmett said.

“Signs of easing lending standards will be the trigger for the regulator rather than the extent of house price gains.

“A soft touch approach from the regulator is likely in the first instance, followed by harder limits, most likely targeted at high debt-to-income loans.”

Lender rates could rise in 2021

Ms Emmett also said that fixed mortgage rates, which have been reduced by lenders in recent months, would likely move higher in the second half of 2021, adding that “we are likely to be close to the bottom in fixed rates”.

She noted that the low mortgage rates had contributed significantly to the strength in the housing market, adding that fixed mortgage rates had fallen at more than double the rate of variable rates over the past year or so, and home buyers have been taking advantage of the lower rates and “flocking” into fixed mortgages.

“But we are likely to be close to the bottom in fixed rates,” Ms Emmett said.

“With the term funding facility (TFF) ending in June, and the likelihood that the RBA (Reserve Bank of Australia) chooses not to roll the yield curve control (YCC) target into the Nov24 ACGB, fixed mortgage rates are likely to move higher in the second half of 2021.”

Furthermore, according to Ms Emmett, there would be significant increases in interest costs.

“Over the past six months, more than 30 per cent of new loans have been at fixed rates,” she said.

“While we don’t have data on the tenor of these loans, it’s safe to assume that a large proportion will begin rolling off from May 2023.

“By then, fixed rates are likely to be significantly higher and variable rates will also likely be higher given higher funding costs for the banks.”

Ms Emmett added that even without a lift in the official cash rate by the RBA, rates could increase as early as the second half of 2021, with ANZ expecting a more significant tightening in 2023.

The RBA recently confirmed that it is not looking to increase the official cash rate any time before 2024 despite expectations that other central banks could raise rates.

It also stated that it is keeping a close watch over lending standards as the property market heats up, and would consider regulatory responses if required, but added that an intervention is not warranted at this point in time.  

[Related: Prolonged rise in riskier loans could spur intervention]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.