It’s kind of funny to watch, in the usual dark way. Having smashed house price gains into the earth last year by breaking RBA yield curve control, the Aussie bond market is now moving on swiftly to crash the property market entirely.
As US bond yields rage higher on the prospect of a hawkish Fed, Australian yields are slavishly following even as the Morricession guts the economy, inflation is far weaker than the US, and wage growth is absolutely nowhere by comparison.
As usual, it is house prices where the rubber hits the road for Australia and on this front, the bond back-up has already overshot spectacularly.
Recall that last year house prices were raging out of control before markets delivered roughly four rates hikes overnight to fixed interest rate mortgages. Combined with a little APRA tightening, that has been enough to stop house price gains in their tracks with very obvious implications for household consumption if they begin to fall.
Yet, here we are in the new year, and bond markets are already pricing two rate hikes in 2022 and pushing now towards a third:
This near-complete normalisation of the rates outlook is despite several obvious factors.
Foremost among them is the RBA which has no intention of delivering these hikes unless wages growth can catapult above 3% in the next few quarters. This is not going to happen by dint of the Morricession alone. Wages might get a lift from an incoming Labor government but there is still a lot of water to pass under that bridge as well, not least being its ongoing commitment to quantitative peopling. Finally, zero-COVID policy prevented Australian labour supply from being damaged in the way that it has been in the US, and participation has rebounded much higher keeping the labour market well supplied.
As well, one only needs to peak over the pond at New Zealand to see how giddy and vulnerable to reversal are the house prices gains of this cycle. Two rate hikes in, a little macroprudential and tax tightening, and the panic is on:
As noted by Chris Joye last year:
Even 100 basis points of RBA cash rate increases would have profound consequences for asset pricing. Combined with some out-of-cycle rises from banks courtesy of normalising funding costs, this would probably force house prices, for example, to correct about 15 to 25 per cent. In fact, the RBA’s own house price forecasting model, which we have replicated and refined, implies a larger drawdown of about 33 per cent.
I will add that because the cycle was to some very considerable degree driven by sub-2% fixed-rate loans that are all going to reset upwards by 1% anyway, we have already embedded the equivalent of four hikes over the next several years, and any move in the cash rate in the immediate future is likely to land on house prices much more swiftly than usual.
Indeed, given this atypical sensitivity of the property market to fixed-rates, I humbly suggest that two cash rate hikes will be enough to begin to sink house prices, which means the RBA will be snuffing out consumption demand and inflation expectations the moment it hikes at all.