Home owners are being urged not to panic about rising mortgage rates, despite predictions that Reserve Bank efforts to tame inflation will spark the biggest downturn in the property market on record.

As banks forecast double-digit falls in house prices next year, mortgage holders are facing a spike in their borrowing costs as soon as next week, with official interest rates expected to rise in May.

Economists said the rate hike would end the COVID property boom that saw prices rise 23 per cent in 12 months, especially after values in Sydney and Melbourne started falling in March.

But although that might sound like good news for prospective buyers and an ominous warning for home owners, experts said the long-term trend for house prices would likely still be an upwards climb.

In contrast to the major banks, housing economist Andrew Wilson said the short-term outlook for prices was neutral or slightly positive as offsetting factors would prop up values this year.

He said renewed demand from migrants and investors chasing higher rental yields would “neutralise” the effect of rate rises on prices in 2022.

“History tells us we need a concerted period of higher rates to start impacting affordability and demand for property,” Dr Wilson, a consultant for Bluestone Home Loans, told The New Daily.

“The initial factor will be sentiment – buyers and sellers will be wary of rates in the short term.”

Rate rises to hit affordability

Speculation about the outlook for Australia’s $9.9 trillion property market is rife after March-quarter inflation rose at the fastest pace in two decades and brought forward the likely timeline for a rate hike.

Some economists now predict the official cash rate will rise from 0.1 per cent to 2 per cent sometime next year – a huge shift that would add hundreds of dollars to monthly mortgage bills.

Westpac said on Thursday that it expects a 0.15 percentage-point hike in May, followed by a 0.25 percentage-point increase in June. That would be a total a rise of 0.40 percentage points.

A borrower with an average $644,000 variable-rate mortgage would face a $193 rise in monthly repayments if interest rates rose by 0.4 percentage points, according to the latest Canstar figures.

Canstar executive Steven Mickenbecker said home owners who bought at the top of the property price cycle in the past year would be the hardest hit by rising rates, particularly if they had a high loan-to-value ratio.

He said mortgage holders would be struck by a double whammy of rising loan costs and falling home values in coming years as the RBA’s post-pandemic rate hike cycle eats into the national property market.

Property prices to fall

So, how far will property prices fall, and how quickly?

Well, unsurprisingly, economists can’t seem to agree.

National Australia Bank (NAB) and Commonwealth Bank are forecasting price falls of 10 per cent in 2023, which would be the largest annual housing decline on record.

The RBA, meanwhile, expects that real property prices would fall 15 per cent if interest rates rose by 2 percentage points – though it would take at least a year to achieve this.

A 10 per cent fall in prices tipped by banks would take national housing values back to levels seen in June 2021, CoreLogic said on Thursday.

CoreLogic’s head of research, Eliza Owen, said such drastic falls would be closer to a market correction than a disaster after the record price growth seen during the pandemic.

“Markets that are more sensitive to interest rate changes like Sydney and Melbourne have already started falling,” Dr Owen said.

“It’s logical to expect house prices to fall [when interest rates rise].”

Mr Mickenbecker agreed, saying double-digit falls in prices would be a “reversion to the mean” after gains made while rates have been so low.

But Dr Wilson thinks house prices will only fall slightly when rates rise.

He said the effect of interest rates on house prices would grow over time though, with the RBA set to hike rates until inflation is back within its target band.

“Higher rates continuing next year will take buyers out of the market and reduce confidence,” he said.

“But any price declines will be marginal.”

BIS Oxford Economics has a similar view to Dr Wilson. On Thursday it forecast that house prices will fall just 5 per cent from their peak, with the bottom of the cycle occurring in 2024.

Don’t panic

Whatever the falls in house prices though, all experts TND spoke to advised home owners not to panic about the coming market correction.

That’s because even though prices will likely fall in coming years, the market should eventually bottom out and start rising again.

Mr Mickenbecker said home owners must take a longer-term view and prioritise keeping up with their mortgage repayments while prices fall.

That will maximise their equity position when values start rising again.

“The history of Australia’s property market is that it’s a nice line that goes up to the right, big time,” Mr Mickenbecker said.

“You get these little kinks where you see falls in prices, but traditionally the market recovers.”

Dr Wilson and Dr Owen both agreed, saying home owners should take a longer-term view.

“This isn’t a scenario where we will see a significant increase in distressed listings or widespread issues in serviceability,” Dr Owen said.

“[House prices] will eventually return to following the long-term pattern, based on what we’ve seen historically.”