SQM Research managing director, Louis Christopher, believes the high inflationary period Australia is entering could actually prevent a house price crash even if mortgage rates rise sharply:
Rising inflation could temper the declines to some extent as higher inflation tended to lift dwelling values.
“There is a chance here with accelerating inflation that investors and home buyers will flock to property to get a hedge against inflation,” he said.
“If we were to see a pick-up in real wage growth commensurate with inflation, similar to what we had in the 1970s, that will likely stop a hard landing in the housing market.”
It is an interesting observation and not without precedent.
Between 1974 and 1979, real inflation-adjusted dwelling values fell by 11%, while also increasing in nominal terms by 56% due to rampaging inflation:
Nominal house prices boomed, real house prices busted.
Thus, it is possible that if inflation remains hot, then real Australian house prices could fall sharply over a number of years while nominal house prices experience only a mild correction.
Indeed, the RBA’s latest Financial Stability Review estimated “that a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15 per cent over a two-year period”. Most of this adjustments could, in theory, be achieved via high inflation eroding values rather than house prices outright falling.
In my view, inflation won’t remain high enough to absorb most of the house price correction. I expect a circa 10% peak-to-trough fall in Australian dwelling values off a smaller increase in the cash rate than what most economists and the market is forecasting.
