What can we expect from the property market in 2022?

The Australian property market has enjoyed remarkable growth in the past two years, putting to rest those early predictions that the pandemic would cause property prices to plummet.

But will we see more of the same next year or are we due for a correction? Below, we take a look at some key trends and developments that everyone with sights on the property market should be aware of.

Where will prices go in 2022?

While there is still momentum in the property market, chances are it won’t be sustained for long. Economists at ANZ are forecasting prices will go up by just 6 per cent in 2022, a massive slowdown from the 20 per cent-plus gains we saw this year.

A year after that, they expect prices to dip by a modest 4 per cent as affordability constraints, higher interest rates and tighter lending rules (more on these below) take a bite out of the previous year’s gains.

If things play out according to ANZ’s forecast, Aussie property prices will be a staggering 27 per cent higher by the end of 2023 than they were pre-pandemic.

CommBank’s forecast for next year (+7 per cent) is similar to ANZ’s, but an expectation that the Reserve Bank will raise interest rates sooner than it’s letting on has it pencilling in a much larger drop (-10 per cent) in 2023. 

Whatever the case, analysts seem to agree that price pressures will persist for another year before things take a slight downward turn. But those hoping prices will drop below their pre-pandemic levels will most likely be disappointed.

Will interest rates go up soon?

Since it cut official interest rates to 0.1 per cent back in November 2020, the RBA has insisted that they won’t go up again until 2024 at the earliest. But RBA governor Philip Lowe was forced to withdraw that forecast last month.

The RBA now acknowledges that we could see interest rates start to rise as early as 2023. In fact, Lowe has said he would like to see the cash rate return to a “neutral rate” of 2.5 per cent — or even 3.5 per cent — in the coming years.

A higher cash rate would mean the economy is on the mend, but it also spells an end to the record low mortgage rates we’ve gotten used to seeing.

Increased funding costs had already forced many lenders to lift their long-term fixed rates. But now that the RBA has confirmed it could start tightening monetary policy in the next two years, that trend is set to accelerate.

As for variable rates, their relationship to the cash rate tends to be more direct. While lenders have still been making cuts to draw borrowers away from their fixed rate home loans, you can bet they will spring back up again once the cash rate increases.

How will first home buyers fare? 

While demand from first home buyers was fairly strong last year — thanks to a combination of government incentives and the fear of missing out  — the cohort has lost much of its appetite in recent months.

According to ABS lending data, the number of monthly first home buyer loans fell 22.8 per cent between January 2021 and August 2021. Sky high property prices, the prospect of higher interest rates, and sluggish wage growth are expected to further temper demand. 

“Housing prices continue to outpace wages by a ratio of about 12:1. This is one of the reasons why first home buyers are becoming a progressively smaller component of housing demand,” said CoreLogic research director, Tim Lawless.

The same can’t be said for investors, who can use their existing properties as leverage to outbid other buyers. While they had sat out the few years prior to the pandemic, cheap finance and the prospect of easy profits now have investors scrambling to re-enter the market.

What’s this about tougher lending rules?

Renewed investor activity won’t be the only challenge first home buyers will have to deal with. Some members of the cohort will also have a tougher time taking out a loan in the first place thanks to recent rule changes by APRA.

The regulator recently informed authorised deposit-taking institutions (ADIs) that they will have to raise their minimum floor rates to at least 3.0 percentage points above their home loan rates.

Previously, banks were required to add a buffer of at least 2.5 per cent (or use an appropriate floor rate of their own) when assessing how much extra borrowers could afford to pay on their loan. 

The changes are only expected to affect a small sliver of borrowers, namely those on the lower end of the income scale. But APRA has signalled that further measures, such as limits on debt-to-income ratios, might be on their way.

For more information on property and lending trends, head over to our home loan statistics page. And if you’re in the market for a home loan, visit our home loan comparison page, or browse the selection below.