ANZ predicts 20 per cent drop in this housing market

The RBA has been hiking rates more aggressively than expected, which will shrink borrowing capacity fast. (Source: Getty)

Faster-than-expected interest rate hikes could see Australian house prices plummet by 15 per cent by the end of next year, according to updated predictions from ANZ, with Sydney's housing market tipped to drop more than other capital cities.

The bank previously forecasted a 3 per cent drop in national house prices for 2022 and 8 per cent for 2023 back in mid-May.

ANZ is now expecting a 5 per cent fall by year’s end and another 10 per cent drop in 2023, which would still leave prices around 6 per cent higher than pre-pandemic levels.

• Also read: RBA warning: Inflation and rates to surge

• Also read: US recession looms: How Australia will react

• Also read: RBA rate rise: What to do if you are facing mortgage stress

The update follows its revised forecasts on the Reserve Bank’s (RBA) cash rate trajectory released last week. The bank now expects to see the cash rate get to 2.35 per cent by November and 3 per cent in late 2023 or early 2024.

RBA governor Philip Lowe has since warned Australians that he expects inflation to reach 7 per cent by the end of the year, and that the central bank will “do what's necessary to get inflation back to 2-3 per cent”.

ANZ predicts 20 per cent drop in Sydney

Sydney’s housing market is expected to fall the most, with the bank forecasting up to a 20 per cent drop in the city’s house prices by the end of 2023.

For Canberra, the bank tipped a 15 per cent drop within two years, with the bulk of the drop-off expected in 2023.

Melbourne’s housing market - which, like Sydney’s, is already cooling off - is also likely to drop by around 15 per cent.

Adelaide’s market is also tipped to drop by about the same amount, but not until 2023.

Source: ANZ

To explain the downgraded forecast, ANZ economists Felicity Emmett and Adelaide Timbrell said borrowing capacity would be more constrained than previously thought due to fast-rising mortgage rates, which would “weigh heavily” on house prices.

“The increase in mortgage rates is now expected to be larger and to come at a more rapid pace,” they said.

The pair expected lower borrowing capacity, not forced sell-offs, to be the main driver of falling house prices as the average borrower had a generous savings buffer.

While the bank now expected bigger declines for the property market, the two economists said the decline would hopefully be moderated by increased immigration and a few other factors.

“Stronger household income growth, large savings buffers, increasing population growth via immigration and continued economic growth will all cushion the fall in housing prices as interest rates increase,” Emmett and Timbrell said.

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to the free Fully Briefed daily newsletter.