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Australia: Will house prices go up in 2023? The answer largely depends on interest rates

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Australian house prices will rise in 2023 if the Reserve Bank pauses rate rises and inflation drops, according to a new report from property analysis firm SQM Research.

SQM Research's Housing Boom and Bust Report for 2023 forecasts capital city house prices will rise between 3 and 7 per cent.

The report's "base case" forecast hinges on the RBA not hiking the cash rate above 4 per cent, inflation dropping to 5 per cent, and unemployment staying below 5 per cent.

"If the [cash rate] target rate stays below 4 per cent, then it is unlikely we will have a flood of forced sales in the housing market," SQM managing director Louis Christopher said.

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"There is, of course, a risk the RBA may need to go further. If they do, then the risks of a hard landing in the economy do substantially rise and, thus, a hard landing in the housing market would also occur."

The cash rate is currently 2.85 per cent, annual inflation is 7.3 per cent and set to hit 8 per cent by the end of the year, while unemployment is at 3.4 per cent.

Interest rates affect how much people can borrow, which in turn influences house prices.

The report's base case scenario forecasts Sydney will see the biggest lift in property values of between 5 and 9 per cent.

Mr Christopher said overseas migration, workers returning to the office, a shortage of rental accommodation and the New South Wales government's changes to stamp duty and land tax would drive the recovery in Sydney.

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Perth house prices are forecast to jump up to 8 per cent on the back of strong rises in employment and interstate migration.

In Melbourne and Brisbane the pace of growth is expected to be slower at between 1 per cent and 5 per cent.

Adelaide's property market could stay flat or record growth of up to 5 per cent.

However, in Hobart property values could fall 1 per cent or increase up to 3 per cent. Canberra property values could drop 3 per cent or rise up to 2 per cent.

Darwin is expected to be the weakest housing market next year, with SQM forecasting falls of up to 5 per cent.

Mr Christopher expects regional house prices to soften.

"I think investors need to be cautious in some of these regions, which absolutely took off during the COVID period," he said.

"We're just concerned now that they are starting to turn and the downturn could be quite severe."

Tightrope to soft landing

The Boom and Bust report models three other scenarios for the nation's housing market in 2023.

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Under the report's best-case or "Goldilocks" scenario, all capital cities except Darwin and Canberra would be immune to falls, with combined average values rising between 5 and 9 per cent. Sydney and Perth would see rises in the double digits.

The "False Dawn" scenario would see only Perth and Brisbane avoiding a drop in property values, with the combined capital city average flat at 4 per cent. That forecast depends on the cash rate rising above 5 per cent in the second half of 2023, inflation accelerating towards 10 per cent, and unemployment staying below 5 per cent.

Under the worst-case scenario, "Recessionary Inflation", capital city house values would fall by up to 6 per cent.

That would occur if inflation stayed above 7 per cent, the RBA lifted the cash rate above 4 per cent and unemployment went above 5 per cent.

Perth would be the only city to avoid falls.

Mr Christopher said the base case scenario was slightly ahead of the other three scenarios.

"This year, we're not as confident about our base case scenario," he said.

"But we still believe that in terms of the individual probabilities, the soft landing scenario is the one that actually has just slightly the greater probability.

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"It does boil down to what the Reserve Bank of Australia does next year, very much so, more than many other years.

"The view is that so far property owners [are] withstanding the interest rate rises which have occurred, but if we do see the cash rate above 4 per cent, it is our view that will be the breaking point for the market."

However, Mr Christopher said despite what would be a very challenging year for the RBA he believed it could put off a soft landing for the Australian economy.

"If they were able to walk the tightrope and engineered a soft landing in 2023, I think they will restore a lot of the reputation that they actually lost over the course of this year and last year," he said.

On Monday, the RBA governor said sorry for saying interest rates would stay low until 2024.

Banks not so rosy

The "big four" banks are less optimistic about the property market in 2023.

Westpac forecasts the cash rate to peak at 3.85 per cent by May 2023, but does not expect the property market to recover until 2024.

“Heading into 2023, the near-term outlook remains bleak," Matthew Hassan, senior economist at Westpac, said.

"The downturn has become more firmly entrenched in most markets, while price-driven improvements in affordability are being negated by rising interest rates and deteriorating expectations for prices and labour markets.

"Overall, it looks to us like we’ve got another 12 months of price declines ahead, but they’re likely to be at a milder pace than we’ve seen through 2022," Mr Hassan said.

NAB expects combined capital city prices to decline 7.3 per cent this year and 11.4 per cent in 2023.

ANZ also expect house prices to fall next year.

The Commonwealth Bank (CBA) has the most positive outlook of the big banks. It expects house prices to continue to fall 15 per cent from the April peak to the trough in the middle of 2023.

CBA's forecasts are conditional on a peak in the cash rate of 3.1 per cent, to be reached by the end of 2022.

"We would anticipate a bigger fall if the RBA continues to lift the cash rate in 2023," CBA head of Australian economics Gareth Aird said.

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