Record-breaking house price rises were one of the hottest industry topics in 2021. The first half of this year appears to be a little different.

Nationally, prices are forecast to lift again in 2022, with Westpac last year revising its earlier call of five per cent to eight per cent.

The bank expects most of 2022’s increase to be weighted in the first half of the year before moderating.

When will Australian house prices drop?

Westpac chief economist Bill Evans says the bank was preparing for the market to move into a correction phase in early 2023 as higher interest rates, stretched affordability and the tightening of macro-prudential policies (financial policies designed to prevent major systemic disruptions) take hold.

“While the market upturn has weathered the COVID disruptions very well and is clearly carrying strong momentum, the boom is entering the trickier territory,” Mr Evans says.

“Price momentum has held up near term, prompting us to revise up the near-term outlook for prices.

“However, affordability is becoming stretched and policy tightening is now in play.”

This prediction follows hot on the heels of record house price increases in 2022.

How rate rises slow growth conditions

Westpac has tipped rate rises ahead of the Reserve Bank’s current 2024 guidance, with Mr Evans forecasting the first increase above the current historically low 0.1 per cent in early March 2023.

Other economists are preparing for the RBA to begin raising rates over 2023 and 2024 to a rate of about 1.25 per cent.

“We still expect the market to slow over the course of 2022 as macro-prudential policy; prospects of increased rates; and affordability reaching record lows triggers a correction phase that will begin in 2023 and is likely to extend into 2024,” Mr Evans says.

“The combination of high levels of the new building and slow population-driven demand may also weigh on some sub-markets.”

CoreLogic research director Tim Lawless says the slowing growth conditions stem from higher barriers to entry for non-homeowners along with fewer government incentives to enter the market.

“With housing values rising substantially faster than household incomes, raising a deposit has become more challenging for most cohorts of the market, especially first-home buyers,” Mr Lawless says.

What’s the good news for homeowners?

“Existing homeowners looking to upgrade, downsize or move home may be less impacted as they have had the benefit of equity that has accrued as housing values surged,” Mr Lawless says.

It’s important to note that housing credit increased at an annualised pace of about seven per cent towards the end of last year. This was more than double the rate of income growth.