From Chris Joye this afternoon:
I am looking for at least two RBA rate increases next year on the presumption the globally synchronised upturn in growth elongates.
And I think that somewhere between the RBA’s second and fourth hikes we get a bona fide correction in Aussie home values that will exceed 10 per cent.
The last correction was similarly driven by an RBA hiking cycle in 2010 following which national prices declined by 6.4 per cent on a peak-to-trough basis. (The heftiest fall on record was 8.3 per cent in 2008.)
While the next downturn may cause some temporary hysteria in markets, the tremendous deleveraging of bank balance-sheets, coupled with the de-risking of their business models and a notable improvement in the austerity of lending standards, should ensure they are well-placed to absorb what will be, by international standards, a modest lift in home loan losses.
Indeed, Australia’s big banks have never been stronger.
In the absence of a global recession, I would consider this an attractive buying opportunity as equity and debt markets are almost certain to overreact to the spectre of a housing correction.
With strong population growth fuelled by net overseas migration that has given us the most multicultural society in the developed world, the long-term outlook for the residential market is positive from an investment perspective as supply will inevitably struggle to keep pace with demand.
There is also every possibility the RBA’s next hiking cycle is deferred until 2019 in which case we may not see a real correction for years. That’s not, however, my own base-case.
Here’s my two cents. The RBA won’t hike rates next year (or in 2019) owing to substantial spare capacity in the labour market, which will likely worsen when dwelling construction falls next year. Australia is also facing falling commodity prices and terms-of-trade, which will drag-down national income, as well as flat to falling house prices in Sydney.
There’s no way the RBA will hike into this environment. Instead, the next move in interest rates is likely be down.
