Australia's housing market is set to drop 18 per cent, according to one major bank, and new data shows regional areas are joining Sydney and Melbourne in the slide.
The prediction of an 18 per cent slump in house prices comes from ANZ, which has slightly increased its forecast fall based on the Reserve Bank's aggressive interest rate rises.
ANZ's economists expect the RBA to hike its cash rate target to 3.35 per cent before the year is out, which would send typical variable mortgage interest rates close to 6 per cent.
"We expect capital city prices to fall 18 per cent over the balance of 2022 and 2023, before a 5 per cent gain in 2024 as mortgage rates fall," ANZ senior economists Felicity Emmett and Adelaide Timbrell wrote.
"The biggest factor driving prices lower is reduced borrowing capacity, not a rise in forced sales.
"Arrears rates are coming from a very low base, households have built up large liquidity buffers, and the rise in the share of loans in negative equity is expected to be modest."
The economists pointed to a large reduction in maximum loan sizes as banks test whether mortgage applicants can service their loans at much higher interest rates than earlier this year.
"Our forecast for the cash rate to reach 3.35 per cent equates to a reduction in borrowing capacity of nearly 30 per cent," they noted.
"This reduced ability to pay up will drive prices lower over coming months. Already housing finance data show that average new mortgage sizes are beginning to fall."
ANZ's forecast is in line with other major financial institutions, with Commonwealth Bank's economists expecting a decline of at least 15 per cent, even if the RBA cash rate only reaches CBA's forecast of 2.6 per cent.
ANZ's economists said a tight rental market, rising immigration and low unemployment would help to mitigate the decline, but it would take a forecast reduction in interest rates to see the market start to turn around.
"In 2024, we expect to see the beginnings of a recovery in house prices, alongside cuts in the cash rate in the second half. We expect prices to rise around 5 per cent in 2024," the economists added.
They are forecasting the biggest falls this year in Sydney and Melbourne, the most expensive capital city markets and therefore most exposed to the effects of reduced maximum home loan sizes.
'Regional prices look to have peaked'
As with the smaller capital cities, ANZ expects the increase in interest rates and reduction in borrowing capacity to eventually hit previously buoyant regional housing markets.
New data from CoreLogic suggest this is already occurring in some of the more expensive regional areas, where reductions in maximum borrowing capacity due to rising interest rates again have the biggest impact.
The real estate research company said the largest quarterly falls in house values occurred in the Richmond-Tweed region (-4.5 per cent), followed by the Illawarra (-3.5 per cent), and Southern Highlands and Shoalhaven (-3.0 per cent), all in NSW, with the latter two areas within two hours' drive of Sydney.
The two key south-east Queensland regional lifestyle markets of the Sunshine Coast and Gold Coast also saw house values decline over the past three months, by -2.5 and -1.2 per cent respectively.
"Typically, markets with a higher median value tend to lead the broader market when shifting through different cycles," CoreLogic economist Kaytlin Ezzy said.
"After recording some of the strongest value growth throughout the COVID period, each of these areas now have a median house value in excess of $1 million.
"As we move further into the downward phase of the cycle we would expect to see this decline in values to spread into more regional areas."
Over the past year to July, regional markets posted an average 17 per cent rise in house prices versus a 5.4 per cent increase for capital cities, where major markets such as Sydney and Melbourne were already falling from their pandemic peaks.
CoreLogic said NSW's Riverina region was the best performer among regional house markets, with an annual increase of 27.8 per cent, followed by Wide Bay in Queensland (up 26.8 per cent), and New England and North West in NSW (up 26.4 per cent).
Ms Ezzy said she expected the fall in regional markets to spread, but perhaps not be as great as that in some of the capital cities.
"It's possible the regional areas will be slightly more insulated than the capitals, thanks to these markets' relative affordability and low advertised supply levels," she explained.
