Even before yesterday’s 0.5% rise in the official cash rate (OCR) by the Reserve Bank of Australia (RBA), major indicators were pointing to the beginning of a severe house price correction.
First, mortgage finance commitments have turned sharply lower which, given historical correlations, points to falling house price growth:
In a similar vein, the nation’s auction clearance rate has fallen sharply over 2022 which, given historical correlations, also points to weaker house prices:
Both indicators together suggest a sharp contraction in home buyer demand.
Finally, Australian consumer confidence has begun this rate tightening cycle below the trough of the Global Financial Crisis (GFC):
As shown in the next chart, the consumer confidence index has historically been a leading indicator for house price growth. Therefore, the current collapse in confidence augers badly for house prices:
The median economists’ forecast is for the OCR to peak at around 2.5%, which corresponds to RBA governor Phil Lowe’s correspondence to the public last month that he expects to lift the target cash rate to at least 2.5%.
The futures market is even more hawkish, tipping the RBA will lift the OCR to around 3.5% by May 2023.
If either scenario plays out then it will obviously cause a further sharp contraction in home buyer demand and consumer confidence, driving a major house price correction.
