House prices in Australia will have surged by 22% by the end of the year but economists can see a gradual easing on the way.

Westpac economists have upgraded their forecast for price growth in 2021 from 18% to 22% after lockdowns in some states had only a modest effect. The biggest gains were expected to be in Sydney (27%), Hobart (25%) and Brisbane (22%).

Low interest rates during the pandemic had been seized on by property hunters but the Westpac economists predict prices will rise by ‘only’ 8% next year.

This was in part due to an Australian Prudential Regulation Authority decision last week, when the banking watchdog told banks it wants new borrowers’ ability to meet loan repayments assessed at an interest rate of at least three percentage points above the loan rate they are applying for.

The Westpac economists said they expected this to be the first of a number of measures to restrain credit and the housing market. They expected the biggest shock for homebuyers to come in 2023.

The report expects the Australian Reserve Bank to raise interest rates in 2023, which would make borrowing more expensive. The Westpac scenario has a rate hike prompting house prices to decline by 8% in 2023.