In the wake of Deloitte Access Economics’ report yesterday claiming that the RBA sitting on housing “powder keg”, ABC’s The Business last night ran a segment examining the issue, featuring SQM Research’s Louis Christopher and the REA Group’s chief economist, Nerida Conisbee.
As expected, Ms Conisbee played down the prospects of a housing correction, claiming that “we’d have to have pretty rapid rises in interest rates for there to be a dramatic decline in house prices”.
Louis Christopher was a little more circumspect, noting that “all it takes is one trigger and sentiment can change, and then you have a correction in the market place, though I think we need to take into account a number of factors that are driving the market right now. One of the main ones is actually population growth and that’s been driving underlying demand…” Christopher goes on to explain that Australia would need to experience both rising interest rates and unemployment for a housing correction to occur. The recent first home buyer incentives will also juice the market in the short-term.
Neither commentator believes that interest rates will rise significantly, with Christopher arguing that “if we had some kind of crisis… the Reserve Bank would respond by aggressively cutting interest rates once again or potentially doing something even further”.
On this point, Nerida Conisbee notes that the banks are already raising mortgage rates out-of-cycle, in part due to the rising cost of wholesale funding.
I will add that with the cash rate at just 1.5%, there is possibly only another 1% that could be cut by the RBA (given Australia must maintain a positive spread to fund the current account deficit). How much of this would be passed onto mortgage holders is debatable, however, given the banks would likely keep a large chunk for themselves.