House prices are a huge social and economic issue in Australia. That is why there is so much written about them and so much analysis on the likely outlook for changes in prices.
And the outlook now remains very much focused on a scenario where prices are likely to fall in 2022. The falls are unlikely to be substantial - 5 to 10 per cent through the year is the most likely scenario.
For the past few months, it has been obvious the current boom in house prices was poised to end. It was a boom built on lockdowns and easy and cheap credit.
Also read: Australia's fastest-selling suburbs
But now, there is the problem of weak underlying demand from near-record-low population growth, accompanied by a surge in new supply driven by a dwelling construction boom.
History shows excess supply of new dwellings has been the driver of house weakness. This supply surge is happening right now with well over 200,000 new dwellings being built annually, which is sowing the seeds of a repeat of that trend.
In addition to this structurally negative issue for house prices, it was also obvious there would be no more stimulus via interest rate cuts. In fact, over the next year or two, the RBA will be inclined to increase interest rates as inflation pressures surface in the wake of global inflation, a domestic economic recovery and a tighter labour market that will kick into higher wages.
Things often change quickly in financial markets and the past few weeks are a classic example of a market repricing on inflation and monetary policy risks.
Rather than assuming the RBA would be on hold with interest rates through to 2024, the inflation lift now has the market pricing in the interest-rate-hiking cycle starting as soon as May 2022 and has around 1.5 percentage points in interest rate hikes priced in by the middle of 2023.
And recall, an extra 1.5 per cent on a $600,000 mortgage over 25 years is an extra $475 a month or over $5,500 a year in repayments.
What will happen to house prices?
Australia wide, it is likely that house prices will fall by between 5 and 10 per cent in 2022. In some cities the fall could be more severe, especially those with the strongest lift in supply.
Larger falls in aggregate are unlikely given the expected sharp improvement in the labour market, including for wages and household incomes, which will work to support the housing market, partly offsetting the impact of higher interest rates.
Also cushioning the downturn will be the gradual reopening of international borders, which will see foreign students and a return to some immigration adding to demand. While this inflow of people will not see immigration return to the excessive levels that were evident prior to the initial outbreak of COVID, it should be sufficient to drive some support for housing.
In what might be a hit to perceptions or widely held beliefs, past interest-rate-hiking cycles have often been associated with rising house prices, not falling prices.
In the late 1980s, when mortgage interest rates were hiked to a staggering 17 per cent, house prices rose strongly.
In rate-hiking cycles in 1999-2000, house prices rose which was a trend also evident in the cycle around 2002 to 2008.
Other factors, including the labour market and, critically, supply and demand, dominated the effect of higher interest rates.
Only with the interest-rate-hiking cycles of 1994 and to a lesser extent 2009-2010 did house prices weaken, but even then, the price weakness was muted.
The positives and the negatives
It all comes down to a new mix of drivers of house prices unfolding right now.
In simple terms, interest rates and supply and demand will have a negative impact.
A sharply improving labour market, including household incomes, will be a positive.
As 2021 draws to a close, the negatives are likely to marginally outweigh the positives, meaning moderate price falls only are set for 2022, but a house price crash - as some love to predict - is very unlikely.