I note today that Australia’s favourite bullhawk, Chris Joye, has claimed that if:
…the RBA starts cutting rates, I would be bullish on housing. Unlike almost any other housing market in the world, Australia is unique insofar around 90% of all mortgage debt is purely adjustable-rate and priced off the RBA’s target cash rate (most other countries, such as the UK, US, and NZ, have a preponderance of fixed-rate mortgage debt). Even the tiny minority of fixed-rate debt that exists out there is fixed for short periods of time (eg, 1-5 years). In sum, this is a very interest rate sensitive sector of the economy. Wages and incomes in 2011–unlike the December 2009 ABS disposable income data reported by some yesterday–are growing rapidly. Unemployment is low. Interest rates are not high. If the RBA gets all dovish on us and cuts rates, house prices are gonna rise.
Blather aside, I’m interested in readers view on this conceit. Given today’s capex data, it is my view that it will take a quite serious external shock for the RBA to contemplate rate cuts, which I still see in the piepline. So, with that backdrop, I thought I’d offer a couple of scenarios to readers. I am interested in knowing how you think each would play out for Australian house prices:
Scenario 1: We continue the death of a thousand cuts. There’s no Western recession but ongoing poor growth and market volatility forces greater still consumer retrenchment. Falling house prices form a nasty feedback loop with falling retail sales and services sector job losses. The mining boom cannot support the rest of the economy. The RBA cuts rates to 4%.
Scenario 2 : The shock comes in the form of a combined US and European recession that also reduces Chinese growth. No bank freeze. The ASX falls 20%. There’s a mild two quarter recession. The RBA cuts rates to 3%. Owing to some more bank gouging, the floating mortgage rate falls to 6%.
Scenario 3: The shock comes in the form of a combined US and European recession that hits Chinese growth harder, accompanied by some form of global bank seizure emanating from a partial breakup of the Eurozone. The ASX falls 30%. There’s a more severe two quarter recession with some government stimulus. The RBA cuts interest rates to 2.5%. Owing to some more bank gouging, the floating mortgage rate falls to 5.5%.
Scenario 4: The shock comes in the form of a combined US and European recession that also reduces Chinese growth to 3%, accompanied by a global bank seizure emanating from an unruly breakup of the Eurozone. The ASX falls 40%. The big four banks are guaranteed again. The government stimulates as much as it can and has enough of an excuse to reinstall the first home owners grant. Even so, it’s a nasty three quarter recession and lousy recovery. The RBA cuts interest rates to 1%. Owing to some more bank gouging, the floating mortgage rate falls to 4.5%.
What do you see happening to housing in each of these scenarios?
