Falling mortgage rates won't spark major recovery

Housing market activity is likely to recover from here, driven by falling mortgage rates. That said, they are set to remain high relative to recent history. Our view is that mortgage rates won’t drop below 6.0% before the end of the forecast, keeping affordability stretched. Poor affordability, tight credit conditions and a slowing economy mean any recovery in demand and sales volumes will be sluggish. Meanwhile, we expect house prices to lose some of their recent momentum. But, we don’t expect any further sustained declines in house prices given the lack of supply of second-hand homes on the market. And in the rental market we expect softening demand and strong completions to drive vacancy higher and hold rents around current levels over the next year or so. That weak outlook for Net Operating Income (NOI) growth, as well as rising cap rates in response to higher Treasury yields, will cause capital values to fall by around 20% peak-to-trough for multifamily assets.