Mortgage rates have risen to a six-month high and will increase further over the next couple of years. While inventory is set to remain tight, cutting the risk of an outright fall in house prices, that rise in interest rates coupled with tight credit conditions will bring house price growth down from its record high of close to 20% y/y now to around 3% y/y by end-2022. Higher financing costs will also weigh on existing home sales. But a healthier inventory means new home sales will see a gradual rise over the next couple of years. Strong new home demand will support housing starts, but a lack of materials and labour argues against a strong rise for the next year or so. The lack of homes for sale, and reopening of offices and cities, has led to a significant rebound in rental demand. That is feeding through to lower vacancy rates, a rise in rental growth and a supply response. A strong rental growth outlook has encouraged investors into the apartment sector, and that will push total returns up to around 19% this year. Beyond that, a gradual rise in yields from 2023 will pull returns down to around 2% p.a. in 2024-25.
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