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House prices should fall next year - Westpac

As mortgage rates rise, Westpac economists expect to see a substantial slowing in house price growth over the coming months, turning to modest price declines by the second half of next year.

Tuesday, November 9th 2021, 11:48AM 1 Comment

by Sally Lindsay

Even then, the recent rate of increase has been so dramatic that, on Westpac’s forecasts, it could take a few years just to get house prices back to where they were at the start of this year.

In the bank’s latest Weekly Economic Commentary acting chief economist Michael Gordan says higher interest rates will have major implications for the housing market.

“We have long used a ‘user cost’ approach to explain the general trend in house prices," he said.

“The key insight is that interest rates, rather than supply issues, are by far the most important driver of changes in house prices,” he says. “Notably, in RBNZ governor Adrian Orr’s speech on housing last week, the analysis behind it also adopted this user cost approach.

“It’s important to note the upswing in mortgage rates is already well advanced,” says Gordon. “While most forecasters – and the RBNZ’s most recent published projections back in August – suggest a peak in the cash rate of about 2%, wholesale interest rates are already consistent with a peak closer to 3% and we expect the central bank to increase the OCR to reach that peak by mid-2023.”

Gordon says wholesale interest rates have in turn been reflected in the sharp rise in mortgage rates over recent weeks. The shorter-term fixed mortgage rates, which are generally the most popular, have risen by more than a percentage point from their lows in July.

“Consequently, even if we’re correct that the cash rate will peak at 3%, a two-year fixed mortgage rate is already closer to its peak than its trough for this cycle.”

Based on these OCR forecasts, Westpac thinks there is value in extending fixed-rate terms as far out as three years. Longer terms (out to five years) don’t offer additional value, though they may be suitable for borrowers who value more certainty in their repayments.

Tags: house prices Westpac

« The tide is turning on house pricesHouse prices materially falling chorus from banks »

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Comments from our readers

On 9 November 2021 at 9:49 pm Greg Fisher said:
Another economist predicting the future, and how many times do they get that right!

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Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.14 6.75 ▼6.39
ANZ 8.64 7.74 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.14 6.79 6.65
ASB Bank 8.64 7.14 6.75 ▼6.39
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
Bluestone 9.24 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Classic - ▼7.14 6.79 6.65
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 ▼7.74 7.39 7.25
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - ▼6.79 - -
Co-operative Bank - Owner Occ 8.40 ▼6.99 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 ▼7.49 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.89 6.55 6.35
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 ▼6.69 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.79 7.39 7.25
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 7.99 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 6.99 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.75 7.35 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.09 7.59 7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.09 8.59 8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 ▼7.74 7.29 6.59
SBS Bank Special - ▼7.14 6.69 5.99
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 ▼6.14 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 7.79 7.55 7.45
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 6.99 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - 6.55 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 7.89 7.35 7.25
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.29 6.75 6.65
Median 8.64 7.21 7.29 6.65

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