In Brief: House Prices, Banks, Equities 

Weekly Reports | Dec 02 2022

Weekly broker wrap: house price declines, strong bank reporting season, domestic equities outperform.

-ANZ predicts an -18% peak to trough decline in house prices over 2023
-Following a positive banking reporting season, deposit competition and mix is critical to industry outlook
-Domestic equitiy market outperforms global market year-to-date 

By Danielle Austin

Domestic housing trough expected in the year ahead  

Rate-driven house price declines are impending, if predictions out of ANZ Bank are to be believed (among others). Anticipating the cash rate to rise to its highest level in a decade at 3.85% in the next year, the bank believes house prices are concurrently on track to fall -18% over the coming year, ahead of a recovery in 2024. 

The bank expects the cash rate will peak in May, and that the impact on house pricing will be fully evident by the end of the year. It anticipates mortgage rates will begin to fall late in 2023, driving a 5% recovery in house prices in 2024. 

Since peaking in March, house prices across capital cities have already declined a combined -6%. Sydney has taken the largest fall, sliding -10%, while prices in Adelaide and Perth have remained largely resilient to date. 

ANZ highlighted that reduced borrowing capacity remains the largest drag on house pricing currently. Should the cash rate reach 3.85%, the bank predicts a reduction in borrowing capacity of more than -30%. While housing finance has fallen -24% from its peak, it remains 28% above pre-covid levels. 

Should ANZ’s model prove correct, it assumes a current tight rental market, rising immigration and low unemployment all help mitigate housing demand weakness. The bank does note risk that house prices fall less than expected, which it expects would drive less softening of consumer spending and subsequently an extended tightening cycle and prolonged pressure on house pricing. 

Banks insulated from asset competition to benefit as rates normalise 

The recent bank reporting season was one of the more positive in recent years, noted JP Morgan, but evolution of deposit competition and mix are crucial to the industry outlook.

Rate leverage saw bank net interest margins surprise to the upside across the majority of the industry, with National Bank ((NAB)) a notable exception. This drove strong half-on-half net interest income growth and positive commentary around net interest exit-margins. 

Short-term, JP Morgan anticipates net interest margins for most banks will peak in the first half of the current financial year, followed by a gradual decline. If JP Morgan’s assumption that the Reserve Bank will issue a further four rate hikes proves true, the broker anticipates banks that are better insulated from asset competition will to appeal to investors. 

This outlook plays into JP Morgan’s industry preferences, with Macquarie Group ((MQG)), National Bank and Judo Capital ((JDO)) making up the broker’s top picks. These are followed by ANZ Bank ((ANZ)), Bendigo and Adelaide Bank ((BEN)), Bank of Queensland ((BOQ)) and Commonwealth Bank ((CBA)). 

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