PHOTO: Will opening the borders make house prices go up or down? Getty Images

A major bank is picking house prices to start declining as interest rates “get back to something more like normal”, and tax changes aimed at evening the playing field between owner-occupiers and investors come into force.

But Westpac forecasts the declines won’t come until 2023, and won’t be anywhere near large enough to make up for the rapid price inflation of the last 18 months.

The Reserve Bank is widely expected to start hiking the official cash rate (OCR) on Wednesday in its next monetary policy statement, bringing it up from the record low 0.25 percent brought in ahead of the nationwide lockdown in March 2020.

“We’re expecting the cash rate to be going up in the coming months,” Westpac chief economist Michael Gordon told Newshub. “Regardless of what happens with the decision on Wednesday – there’s been speculation that it might not just be a 25 basis-point move, it might be 50 – either way I think we’ll be looking at a cash rate of 1 percent by the end of this year, and further increases after that as the Reserve Bank looks to back out of the stimulus it put in place last year and get back to something more like normal.”

It’s been more than seven years since the OCR went up. In that time, the median house price has doubled – about half of that increase coming since the OCR dropped from 1 to 0.25 percent in March 2020.

Gordon said the low OCR, designed to encourage borrowing and investment, has been the biggest factor in the rapid rise in house prices.

“A lot of the 30 percent rise in house prices we saw over the last year was really about those record-low mortgage rates… the shortage of housing was a factor, but that’s not something that suddenly came on in the last year. It was very much about the low borrowing cost side of the equation.

We think it will work quite strongly in the other direction too.”

Westpac’s latest Economic Overview, released on Tuesday, forecasts price inflation will slow over the next year as the OCR creeps up towards 2 percent. By 2023, prices should start falling.

“Over the long-term, it depends on where interest rates end up… looking several years ahead, there’s also factors going on,” said Gordon, noting while the tax changes aimed at landlords haven’t had an impact yet, it’s likely they will as they’re phased in over the next few years.

That’s the most house prices will fall in a single year, according to Westpac, is about 4 percent. By 2025, they’ll be stable or rising again.

Westpac's forecast.
Westpac’s forecast. Photo credit: Westpac