Investors are maintaining their cautious stance on the housing market but a likely pick-up in activity from their segment could potentially contribute to the predicted price drop in 2023.

In the latest Westpac Bulletin, Westpac chief economist Bill Evans pointed to a correction in the housing market in 2023, with prices declining by 5% amid an expectation for the Reserve Bank of Australia (RBA) to raise the official interest rates.

"We now expect a 22% gain for the full 2021 calendar year, but we still expect momentum to slow considerably through 2022,” Mr Evans said.

“Overall, price growth is expected to slow to 8% in 2022.”

Mr Evans said regulators should keep monitoring investor activity, where risks could potentially arise.

"If we were to see a more meaningful pick-up in investor activity, that could drive stronger and more persistent price gains near term but may also result in a more material correction from 2023," he said.

Mr Evans believes investors have so far remained cautious in the current market cycle.

"That has shown signs of shifting in 2021, with the segment share lifting towards 30% — a shift that is to be expected when prices are rising, with investors less sensitive to deteriorating affordability," he said.

During the 2015-2017 cycle, their share in overall housing finance was at around 40%.

Mr Evans said affordability drivers will boost investor presence over the next year and this could end up as a factor that could potentially mean a steeper price correction by 2023.

This is why the effectiveness of macroprudential policies of the Australian Prudential Regulation Authority (APRA) will be an important factor in easing the risks.

"APRA imposed speed limits on investor credit growth in 2014 and a cap on the share of interest-only loans in 2017 while more recently we have seen the RBNZ put tighter caps on the share of high LVR investor loans," Mr Evans said.

APRA intervention comes earlier than expected

Mr Evans said APRA's recent move to increase the servicing rate by 3 percentage points marks the first step in what is expected to be incremental tightening of the macroprudential policy.

"This clearly cautions against further upside to prices. However, as we have noted previously, stretched affordability driven by prices alone is not usually sufficient to drive a meaningful market slowdown," he said.

"The shift on macroprudential policy has come a little earlier than expected – before the full scale of the ‘delta’ shock has been confirmed and ahead of reopening, signalling a degree of urgency."

Mr Evans said these measures will take some of the heat out, "lowering price gains by a few percentage points rather than driving a sudden stop."

However, he acknowledged the timing of the next move is likely to be complicated, given that the full impact of the recent adjustment could take several months to become apparent.

Furthermore, the holiday hiatus is likely to put markets on hold, leaving February as the next opportunity for action.

On top of that, there are talks about the possible federal elections in March, which makes it more uncertain when the next set of controls will be introduced.

RBA's next rate hike likely to come early

The RBA has, for the past months, firm in their expectations that rate hikes are unlikely until it achieves its economic targets by 2024.

However, Mr Evans said the timing of the rate hike could come much earlier

"Westpac expects the RBA to achieve its key policy objectives – full employment, a lift in wages growth and inflation back at the middle of the 2-3% target band – by the end of next year, setting the scene for the beginning of an official interest rate tightening cycle in 2023," he said.

While the RBA's current view will help sustain price growth in the near term, tightening in financial conditions are anticipated as early as the second half of next year.

"As we move into 2023, the impact of the RBA’s tightening cycle will weigh more heavily on housing markets as borrowing capacity is impacted directly and as sentiment turns, with a tightening cycle seen as offering little scope for further price gains."

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