Following the release of the monthly RP Data-Rismark and Residex house price results yesterday, I thought it timely to update how the housing market – in particular house prices – is responding to the latest round of interest rate cuts, which began in early-November 2011 and has seen mortgage rates fall by around -1.5%.
The first chart below compares the growth in the RP Data-Rismark 8-city dwelling price index since end-October 2011 (i.e. immediately prior to the first interest rate cut) against the growth achieved following the commencement of the three prior interest rate-cutting cycles in 1996, 2001 and 2008:
As you can see, capital city dwelling prices have remained more or less flat since October 2011, according to RP Data-Rismark. By contrast, at the same stage of the three prior rate-cutting cycles, dwelling prices had risen by an average of 16%.
The Residex house price index has shown better growth, with capital city prices rising by around 1% since October 2011. But again, this is well below the 13% average growth experienced at the same stage of the three prior interest rate cutting cycles (see below chart).
unconventionaleconomist@hotmail.com
A recent constant but modest upward trend – the RBA will be very happy with this.
Very happy? You don’t think the RBA would be a little concerned at the lack of effectiveness of this cycle of rate-cutting vs past cycles?
I’d say half-happy – they’ve so far done half a Greenspan, eliciting a share market pullup, while giving “confidence” back to the property market, but without the actual gains.
In other words, they are trying to repair and boost household balance sheets without increasing non-asset inflation.
Or, a deleveraging without actual deleveraging or inflation used to mark down asset values.
Add an Abbott victory after the peak of the mining boom and if they can keep the “boosting” or “goosing” of secondary asset markets going, they may pull off a full Greenspan….
IYKWIM
Just to clarify, you do mean the precipitous and unmitigated collapse in house prices and equities that occurred a few years later?
I honestly don’t know what an Abbot led government might do, and nor do I know what a desperate Gillard might promise in the heat of an election for home owners who are the bulk of the voters.
I suggest that both are more likely to promise good times than austerity.
I think we can all agree that the average wage to average house price ratio is a metric constraining house prices. However whats constraining wages?
This may seem like a silly question but with manufacturing comprising such a small percentage of the Aussie economy, import replacement is no longer a wage moderating vector.
Makes me think it’ll all come down to inflationary expectations, which raises the question, How high can housing go before the wage/price spiral starts?
I tend to see it the other way around. How long can they keep things afloat with wages where they are, and more importantly with private debt where it is.
At the moment you currently have wages in
Manufacturing
Services
Education
Government
Being hammered or capped
As Peter F says the RBA will be happy with a 1% increase because it at least gives the impression of things going up (and therefor offers at least a remotely plausible case for further housing construction and the jobs the RBA is trying to stoke).
But against the backdrop of jobs in the above sectors not being remotely credible at an import competing level, and with average punters in debt to 140% of their disposable income, the only way you could get a serious rebound in housing prices is if the RBA opens the sluices further to encourage speculative funds (which would appear to be the case with the rebound such as it is), if the banks could let themselves (and their clients) expose themselves further to mortgage debt without factoring in the vicissitudes of potential job losses in employing sectors of the economy, or if property developers/vendors dropped prices (fat chance).
Four years ago I bet on deflation rather than inflation. Turns out I was correct for most of the world and completely wrong about Australian asset values. Fortunately imported deflation kept the economy in balance.
Over the next 4 years I think it will be impossible to avoid imported inflation so I’m betting on wage price spiraling and stagflation for Australia. It’ll be Aussie manufacturing’s coup de grace, but I suspect the blow-back will also irreversible tarnish a other exposed externally focused industries like services / education.
OK, I am with you, makes sense from that point of view.
But it does mean that someone needs to get in touch with various state governments, right wing employer groups, Uncle Robert Gottleibsen and the mainstream media and tell them to stop banging on about the possibility of a wages breakout, as well as get in touch with the Union movement and give them a burst about lacking vision and cojones with their ambits.
Did anyone notice Bill Gross’ article over at Businessspecttor
http://www.businessspectator.com.au/bs.nsf/Article/credit-markets-risk-return-banking-debt-dollar-pd20130203-4KDWF?OpenDocument&src=sph
It got a run here on the weekend, Bob
http://www.macrobusiness.com.au/2013/02/weekend-links-2-3-february-2013/
Bob, which sectors do you foresee wages rising?
1) Finance will lead the wage inflation stakes, if for no other reason than the manner in which bonuses are linked to possible but as yet unrealized gains.
2) Real Estate for obvious flow-on reasons.
3) Professional services (Legal, health, medical etc)
$) Tradies (especially strongly unionized tradies)
Unskilled unemployment will be the only moderating force, because external capital will remain readily available given the recent moves by the BOJ.
Maybe we can pray for the $AUD to retreat and suck hot money from the economy, but for me that prayer smacks of desperation and directly creates Inflation (oops)
Wage price spiralling to where? We are already priced out of the global market. Stagflation yes…
Imported inflation will be the killer. At today’s petrol prices if the AUD were to fall to .80 USD, we would be paying 1.70 for a litre of petrol. That, plus the fact that we import everything anyway.
So the dollar rises – we lose more jobs and import more, alternatively, the dollar falls – we import inflation and interest rates must rise.
We are on the knives edge, but I suspect we have a few more years of this high wire act before a finale. The only way I can see us getting out of this is by reform, better tax system, better incentives and common sense, but that ain’t gonna happen.
weak as p…
In general, what effect would one expect a drop in interest rates to have on the sale price of a given house?
I think this would depend on the type of house.
Nice to see house prices on the up and up again.
Archie, do you do this just for yucks? If your aim is to persuade, you DO realise that you’re having the opposite to your desired impact, right?
He’s a permabull pro-housing antiscience astroturfer. Why not ban him? Is he using Tor like the rest of ‘em?
it s not about being bull or bear it s about be open to facts.And house prices are rising more likely than not, i m fine with it.
no surprises on Melbourne. Lowest yields due to crazy prices. The worst of a bad bunch. I have lived here for 7 years after job relocation, I like Melbourne but struggle to see the value proposition of buying a house. Sydney is mental but at least you have awesome beaches, harbour, vistas and generally better weather. Brisbane has that too and comparatively cheap property and the sunshine coast / gold coast close by. Melbourne is flat and barren with a featureless harbour. There are nice leafy suburbs for sure, but I’m not enticed to pay the prices by any means. prefer to rent for a third the cost of buying.
… oops, I forgot about the laneways – now everything has clicked into place.
Squirell, You left out the wonderful (variety of) weather that only Melbourne seems to provide
.
Mind you, it really has been nicer here lately than Brisvegas or Sydney so perhaps I shouldn’t joke.
I agree with you though. Huge tracts of Melbourne (especially in the west and deep south east – Cranbourne for example) are just cultural & visual wastelands. Think McMansions in sheep paddocks and you would be close.
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