Markets determined to annhiliate Aussie house prices

The latest interest rate markets from Westpac show no more awakening to sense and still pricing 14 rate hikes by mid-2023:

 

Given house prices are already falling in Sydney and Melbourne, if markets are right, it will send prices into a downward spiral unseen in modern times.

There is no way to know precisely how far and fast prices would fall but the RBA cautions that every 1% move in rates shifts house prices by around 20%. So we are talking in the realms of a halving.

Obviously, this would shatter the economy if there were no commensurate offset. Is there anything in the pipeline to suggest one?

The only way that this could prove to be the case is if Australia enjoys another gigantic mining investment boom.  And by gigantic I mean as large as that which transpired post-GFC:

As you can see, the price driver is there for a renewed investment boom. But it is not on the books yet and is not likely to happen for a number of reasons.

  • The key price drivers of the boom are the bulk commodities of iron ore, thermal and coking coal. Of these, iron ore is in a structural glut and will attract no investment. Ditto for both coals are under ESG pressure permanently.
  • There are base metals and green metals but these are quite small by comparison to the bulks.
  • That leaves gas which could get a new project in WA but nothing like the east coast boom post-GFC.

In short, the prospect of another once per century mining boom just ten years after the last is slim so there is no economic tailwind that would require the room to drive interest rates so high.

I suspect that we’ll see a few hikes running into a major global bust as the European war and energy shocks, Chinese property and OMICRON shocks, and US interest rates shock combine. We might get a 5-10% house price correction before the RBA is begging everybody to buy houses again with cheap money.

Houses and Holes
Latest posts by Houses and Holes (see all)

Comments

    • House prices up 100% in last 5 years. Down 4 % in the next year. CRASH ! Quick drop the rates.
      What a (not) scary (not) crash…That’ll make them affordable.

  1. happy valleyMEMBER

    “I suspect that we’ll see a few hikes running into a major global bust over the next year with a 5-10% house price correction before the RBA is begging everybody to buy houses again with cheap money.”

    Captain Phil’s guv term ends in Sep 2023 and he probably wouldn’t be looking for a renewal, preferring to leave the great housing pricing bust bookend to his greatest-ever house price bubble and social divide to someone else at the RBA and those poor cousins at APRA.

    Maybe, former Vice Captain Guy could see the writing on the wall and becoming seriously rich working for Twiggy was a no-brainer decision?

    • There is total bust anyway. look at the unpayable govt debt in the west, supply chains problems. The close down destruction of small business, the strange destruction of 12 food and distribution services in the USA is food for thought, drought. And many new billionaires created in the last 2 years.so they are fine it’s the masses who suffer and will suffer.

      Beyond that the pension funds cannot survive on zero, negative or near zero interest rates. Presumably lots of pension recipients have died in last two years but not enough still a burden. Be lots of fun when interest on govt debt in the trillions goes up. For me, any interest rate increase means money for me. Germany has had 40% inflation in the last month, that’s going to be fun too as the year goes on. EU has really stuffed up.it goes on, the loss of fertiliser and ammonium from Russia and Belarus…loss of neon thus inhibition of microcircuitary manufacture.

      Last year UK had problems packing upmarket display food due to lack of nitrogen as the eu was not producing it as a fertiliser byproduct. Then problems in the EU agricultural countries, shortage o cans for produce. If and when supply of pharmaceutical drugs hits that will be another avoidable shock.

  2. house prices can halve and still will be bad value for money. the quality of housing in australia is atrocious.

      • No, it’s atrocious now.

        50% of new builds have things like plumbing going through the roof using plastic pipes and cable tied to the wall.

        Plumbers have so much work on new builds, preventing 20L per minutes leaks coming through the ceiling.

        Good builds stopped around 1997.

        • Ian ArunMEMBER

          i always wondered what’s reasoning behind having water pipes in ceilings….most likely its less expensive

          • boomengineeringMEMBER

            Rusty Penny, thanks, last time I lived there and left in 1989, but didn’t notice on the visits after.
            A sorry tale.

          • Retro fitted solar hot water for starters
            2 storey houses

            That’s not the reason.

            I mean where do you go… find a job in the past 15 years when the tape on the gyprock ceiling doesn’t glare out? Bad plastering.

            Guttering with no fall (gradient), insufficient soakwells.. al my friends who have a new house are consistently spending years of build 2-5 years, devastated about the poor quality they have spent $250k on.

          • call me ArtieMEMBER

            If it’s built on a slab, there’s nowhere else to put any new or altered plumbing.
            Except outside the walls I suppose, which would usually be unacceptable for complexity and aesthetic reasons
            Same is true for sparky work – it pretty much all has to happen in the roof space.
            Slab houses are cheap and stable, but I wish mine was actually on good concrete pillars with wood floors and under-house space instead. Rolls-Royce stuff for a new build these days

          • it’s the unfitted, cheap plastic pipes held down by cable ties that I’m pointing at.

            Where I saw it in abundance, was a suburb my SIL lived, it had a rat plague… they can smell the water through cheap plastic pipes, plant enough difenacoum, and here come your leaks.

  3. kiwikarynMEMBER

    A house nearby sold for $840k in March 2020 and resold yesterday for $1.36M. Prices could literally drop by 40% and most people will still be fine. Those that bought in the last 2 years might not be, but hopefully the banks tested their ability to withstand mortgage rates of 6%+. If not, I wonder if there is an opportunity for an irresponsible lending claim against the banks?

  4. I have been told multiple times by many different wealthy people, that the serious money is made in a recession not a boom.
    Maybe the 1% have decided that it’s time for a proper recession so the plebs can be put back in their place 🤔

    • pfh007.comMEMBER

      In a recession those who have liquid funds or are considered credit worthy are well placed to acquire assets at low prices.

      Usually that means rich people.

      The problem with recessions is that even though asset prices fall it can be very hard finding the funds or credit to buy them.

      • Yes, you’d think the penny would drop as to why we persist in having a structure that keeps delivering boom and bust. Old money was in from the start. Buying low and selling high is much easier when starting from the position of owning everything – as becomes clear to any investor able to maintain a long and patient horizon.

        Every cycle you just tilt the chessboard up and every piece rolls into your pocket. Game over. Then you set the pieces again having stripped all the gains from productivity into your own pocket, ready for the next run up.

        And everybody knows…

    • working class hamMEMBER

      Only the really wealthy can leverage in a recession, cash will be king for those who timed it right.

  5. The RBA will be no different to most major companies – they give the top job to a female just as things are about to go pear shaped or just after. That means we are just about there in terms of TSHF.