ANZ, Westpac: Interest rate shock to crash house prices

Mwahaha. There’s no sensible caution on interest rate forecasts at the ANZ like there is at CBA.  ANZ has gone all-in on a massive ten rate hike cycle with a terminal rate above 3%:

Eventually we see the cash rate reaching into the 3s.

Given the strong inflation print, and reports from the RBA’s business liaison program that ‘wages growth had continued to pick up in the March quarter’, we don’t think they need to wait for more data on wages to conclude that the current inflation will be sustained.

Those twelve rate hikes will sink Sydney and Melbourne property prices by 20-25% is my (and the RBA’s) best guess.

That’s enough to crush the VIC and NSW consumption economies so I can only assume that ANZ also sees some gigantic boom elsewhere in the Aussie economy. Either in exports or public and private investment.

There is a strong fiscal tailwind of infrastructure projects to help:

But that is all for this year. Next year it’ll add nothing to growth as the spending plateaus.

Perhaps it’s another hundred-year mining boom that ANZ is counting on. Prices are signaling the need for it:

The problem is that iron ore is still in a glut. Coal is uninvestable owing to climate change. And gas has largely exhausted the good projects.

Therefore, by definition, there will be no repeat of the post-GFC investment boom because these are Australia’s major three commodities by a country mile.

Westpac is less hawkish than ANZ on interest rates, seeing a total of seven hikes and a peak rate of 2% but it still forecasting a -14% dump in prices house prices:

The more compressed and earlier interest rate tightening cycle also means the rapid run-up in Australian dwelling prices over the last eighteen months is almost certainly over.

Momentum has already slowed in markets where affordability is most stretched, prices have stalled in Sydney and Melbourne.

Buyer sentiment, turnover and auction activity are also pointing to a clear slowdown that should accelerate as official rates rise and the prospect of ongoing increases through the remainder of 2022 confronts buyers and sellers.

Previously we had expected markets to retain some price momentum in the first half of 2022, tipping into correction mode in the final quarter. That momentum has faded already, and the tipping point is closer. Accordingly, we now expect:

• 2022 – prices nationally to finish down 2% – meaning a 4% decline from the current peak (and compared to +2.5% previously).
• 2023 – a further 8% fall in prices, slightly larger than our previous forecast of –7%, as the tightening cycle continues to impact.
• 2024 – a further 1% decline in prices as weakness carries into the first half of the year, only partially offset by a weak recovery in the second half as prices essentially stabilise (compared to –5% previously).

Note that the peak to trough decline is still around minus 14% in nominal terms. We have only lifted the terminal rate by 0.25% from 1.75% to 2.0%.

By the end of 2024 the mix of lower prices and higher incomes will have more than offset the effect of higher rates, restoring affordability to more normal levels for most markets. The initial recovery is likely to remain subdued as rate cuts – an important catalyst for housing upturns – are not expected. The cash rate is forecast to hold at 2% throughout 2024.

My own view is that both will be wrong; that prices will fall faster than most expect and a global recession overtake the Australian economy before the RBA gets very far.

Houses and Holes

Comments

  1. The biggest need, in the long-term, is to make sure at least 80% of young working couples who desire to, can buy a house, and start a family in their mid 20’s and do so without major financial stress. This is critical to maintaining birthrates, and so the sustainability of any society (& people) that wants to survive, other than continuing in name only by importing their replacements.

    Start families later, or in lower volumes, and birthrates never reach replacement. Remove the ability of the majority to be financially secure in their own – family suitable – home, and lose on family creation similarly.

    What would it look like to make quality family housing available to purchase for a single income, average wage, family?
    Perhaps a tight cap on borrowing based upon 5~6x income?
    Perhaps stamp duty waivers, significant tax credits, and land duty waivers for working young families?
    Guaranteed government loans at 2% interest?
    It is essential enough, that even if such families needed to be given a $100,000 deposit boost for their homes, and all of the above, that it be done for the sustainability and quality of life of the people.

    There should be no issue in treating singles and families with children massively differently in terms of taxation, and shifting the burden relatively to one over the other. Societies need to incentivise family creation. It is how they survive.

    • Jumping jack flash

      If house prices returned to being a function of wages and savings capacity over, say, 5 – 8 years, then that’d be great.

      At the moment though house prices are a function of how much debt can be leveraged from wages and savings over 5 – 8 years, maybe longer.

      If the average person can earn 60K, say, and save 20% over 5 – 8 years, then houses in a place where jobs and wages are abundant, should be priced starting at around… 90 to 150K!

      Instead we now require *deposits* of that much, leveraged into sweet, sweet debt.

      Using debt should be completely unnecessary and disallowed because once debt is spent on discretionary items, including houses, that have no inherent ability to repay the debt plus interest except through using more debt and trickery, it leads, inevitably, to the total mess we have today.

    • ErmingtonPlumbingMEMBER

      “The biggest need, in the long-term, is to make sure at least 80% of young working couples who desire to, can buy a house, and start a family in their mid 20’s and do so without major financial stress.“

      For 80% of Boomers this was doable for sole income families.
      What happened?

      • What happened? Women’s liberation doubled the labour supply and lowering of lending standards allowed greater leverage. End result is an arms race.

        • BoomToBustMEMBER

          Correct, I’ve said women’s liberation has backfired immensely on families, 30 years ago you could afford a house on a single wage, if you had husband and wife working you were very well off, now dual income is the starting point. And the wife is now a slave to to working like the husband. Welcome to the new world order.

    • Absolute BeachMEMBER

      You want something that is both desirable and necessary for a good life Mr Huggins. But at no point do you suggest removing tax breaks for investors or any other method to stop property being an investment asset. This MUST happen.
      Property is an unproductive asset compared to starting or investing in a business.

  2. Jumping jack flash

    “Perhaps it’s another hundred-year mining boom that ANZ is counting on. Prices are signaling the need for it:”

    Lol. Who would buy it? How would they pay? A lot, if not all, of that demand was due to debt spending in the years leading up to it.
    Thanks, Greenspan.

  3. 6m BBSW already at circa 1.5% and overseas borrowing costs for banks have spiralled.

    It’s coming whether my namesake puts his toy money 10bps chip on the table or not.

    • Goldstandard1MEMBER

      and of course that was ALWAYS the point ppl missed. It didn’t matter what happy clappy Phil promised, it’s out of his hands and all bets are off when the government changes.

  4. kannigetMEMBER

    Had a conversation with an expert on r/AusFinance last night.. Apparently no one in the executive levels of banks are concerned there is potential for a crash. He defined a crash as Mass mortgage defaults, but he was adamant they were not concerned at all.
    I have an Acquaintance who is in the C-Suites of a Westpac spin-off and he said they are concerned that if rates go up too much things will collapse. Now ANZ seems to be indicating they see the same sorts of potential..

    But, this guy was an expert so there is that.

    • happy valleyMEMBER

      Wonder how good ANZ’s mortgage security valuations will look if they have to endure a 14% haircut?

      Ah, just fool the auditors that it’s all cool?

        • Absolute BeachMEMBER

          What you say is correct Mr Phil. Offshore funds flow to the greenest pastures. The RBA is not acting in a vacuum. The upward trend in yields elsewhere (and FX risk..) means they they have little or no control once the momentum changes to tight money. Spending stalls due to higher loan repayments AND rapid inflation continues. Inflation is likely to trend down, but once the tightening cycle begins the whole virtuous circle reduces. Spending down. GDP down. Unemployement up. Capacity to borrow and pay reduces. Blah. Blah. It’s puss easy to goose growth with low rates but hard getting that soft landing.
          Would they reverse course if houses tank while inflation is rising????

    • Blackrock or someone will waltz in and take all those default homes off the banks hands …. thank you very much

  5. wasabinatorMEMBER

    There’s more things they can and probably will try. Like longer mortgage terms or even inter-generatonal ones.

    • Yeah they’ll probably try that but first they have to go through a few hikes, experience an economic crash again and then have the justification for much more support. No doubt there’s some planning going on already.

  6. pfffft, 1.5% max….if that.
    Just this week; 0% GDP in France, Spain 0.3% GDP, US -1.4%
    Bunch of bad retail sales across the globe.
    raising rates while inflation is hot will crash everything then its back to where we started.

  7. From ANZ New Zealand last week:

    To see house prices back at their pre-pandemic level relative to incomes, the decline in house prices over
    2022 would need to be closer to 30%. That’s not our forecast, but a pure housing fundamentalist might call that a reasonable correction.

    https://www.anz.co.nz/content/dam/anzconz/documents/economics-and-market-research/2022/ANZ-PropertyFocus-20220428.pdf
    The fact they’ve even mentioned ‘30% correction’ by the end of this year is, well, courageous to say the least. And whose to say they aren’t too far off the mark?