Westpac Forecasts Sydney Property Prices to Rise 10 Percent this Year

Westpac’s senior economist, Matthew Hassan, said that recent unexpected momentum in the house market recovery has prompted them to reform previous predictions.

“The strength of Australia’s housing market in 2023 has surpassed expectations, with the sustained recovery causing us to lift our forecast for prices, although affordability will keep gains in check over the longer term,” said Mr Hassan.

“Strong migration inflows, tightening rental markets and low on-market supply continue to be important drivers. It’s probably no coincidence that the cities which have seen the biggest swing in net migration flows, such as Sydney and Melbourne, are also seeing the strongest price growth.“

Westpac confident rates are at their peak

In good news for mortgage holders, the bank is confident that the RBA’s rate hiking cycle has come to an end.

The RBA elected to hold rates for the past two consecutive months, after inflation figures showed promising signs of easing.

Westpac has joined a wider consensus that the RBA has implemented its final rate rise, and that rates will now hold steady until the RBA begins to cut them next year.

“The waning threat of more RBA interest rate increases is another positive for the market. 

“The central bank has indicated that it’s now more confident about inflation returning to the 2 to 3 per cent target band by early 2025 and as a result we think policy rates have reached their peak,” said Mr Hassan.

“There’s no longer the threat of additional rate rises. That momentum’s been sustained despite some interest rate increases from the RBA. 

“So we think policy rates have reached their peak and that means we’re not going to get another knock on the housing market from additional interest rate increases,” said Mr Hassan.

Three of the big four banks share this same view, with ANZ and Commonwealth Bank both predicting this to be the peak of the cash rate, according to RateCity.

Commonwealth Bank believes the cash rate will drop to 3.1 percent by the end of next year and Westpac believes it will drop back to 2.6 percent by the end of 2025.

Westpac’s revised forecast, triggered partially by their belief that rates are at their peak, has mirrored similar revisions by their peers.

Revised forecast brings bank into line with fellow big four’s

Westpac isn’t the first bank to revise their property prices forecast over recent months. 

The property market has shown great resilience, in the face of rising rates, taking economists by surprise.

Many had hedged their bets on Australian property prices taking a longer, deeper dive. 

Even after prices had quickly bounced back, economists still found it difficult to believe that the market had already been through the worst of the downturn.

But banks have now come to terms with the robust recovery, and revised their forecasts just as Westpac did this week, to reflect the strength of the market.

NAB revised theirs in June, predicting that Sydney will experience 12 percent growth over the next two financial years.

They’ve also pencilled in ten percent growth nationally, by the end of next financial year.

ANZ revised their outlook earlier this year too, changing their forecast from a fall in house prices, to a modest rise. 

But the peak in the cash rate could prompt them to revise again, as Australian property prices continue to rise, and NAB and Westpac pencil in much more significant growth.

Migration and short supply driving Australian property prices up

Mr Hassan credits migration and low housing supply as the forces driving house prices upwards.

Over the next four years, Australia is set to welcome 1.24 million overseas migrants, many of whom are international students who prefer to settle in inner city apartments, close to education and transport.

But our housing supply is already experiencing a crippling shortage, that has sent rents skyward, and deteriorated housing affordability.

“Strong migration inflows, tightening rental markets and low on-market supply continue to be important drivers,” said Mr Hassan.

“It’s probably no coincidence that the cities which have seen the biggest swing in net migration flows, such as Sydney and Melbourne, are also seeing the strongest price growth.“

In addition to migration, foreign investment could be set to have a profound impact on Australian property prices.

The Australian Financial Review published a report this week, attributing China’s property crisis as another key driver of demand for Australian property. 

And it’s a valid claim to make, given that in the first quarter of this year, Chinese investors purchased $700,000,000 worth of Australian residential property – equivalent to purchasing $7.7 million of property every single day.

Chinese citizens who have accumulated record amounts of savings during years of Covid restrictions are looking at property markets abroad, as theirs shows dangerous signs of volatility.

International real estate group Juwai IQI Holdings reports that they’ve received a high volume of enquiries regarding Australian homes from Chinese property buyers. They say Australia is sitting as the top priority for Chinese investors.

New peaks to be achieved

While affordability constraints will slow the rapid rate of growth we’re currently seeing, Westpac says that population pressures will overcome any dampening from interest rates, and new peaks will be achieved.

“Notably, our revised forecasts mean prices nationally will be pushing above their previous peaks by late 2024 despite interest rates still being 3.5 to 4 percentage points higher than when those peaks were achieved in 2022,” said Westpac.

Mr Hassan notes that there will be some who benefit from this kind of outlook, but also some Australians who will suffer from a lack of affordability.

“Overall, the housing market recovery is looking more assured, and that will be a positive for some, but it will add to the challenges we’re seeing on the affordability front,” said Mr Hassan.