Aussie housing market braces for $3 trillion wipeout

Christopher Joye, portfolio manager at Coolabah Capital Investments, has warned that Australian housing values could plummet more than 30% if the Reserve Bank of Australia (RBA) lifts interest rates in line with the market’s expectations:

Aussie house prices could fall by more than 30 per cent if the Reserve Bank of Australia’s fulfils uber-aggressive market expectations for an increase in its cash rate from the post-pandemic nadir of 0.10 per cent all the way to 4.25 per cent. This would translate into an increase in the cheapest discounted variable mortgage rate from around 2.25 per cent to 6.50 per cent, or possibly higher given bank credit spreads (or funding costs) have widened sharply…

Coolabah Capital Investments has analysed the impact of temporary changes in interest rates on the housing market, focusing on current market pricing of a broad peak in the cash rate of 4.25% over 2023 followed by rate cuts in 2024 and 2025. This analysis suggests that this cycle in interest rates still has a significant effect in the short term, pointing to a large correction of about 30% in national home prices over the next four years (or circa 40% from late 2022 onwards). There is significant uncertainty around the model’s forecasts, but the results suggest a large short-term correction is in store as the RBA takes back its emergency policy stimulus…

Forecast house price losses

Given the dramatic rise in the interest rate sensitivity and debt levels of households, there is a case for the central bank to carefully evaluate shifts in behaviour in response to tighter policy.

At this juncture, the RBA does not seem concerned about the consequences of policy overreach, and—based on Governor Phil Lowe’s public remarks—it wants to quickly lift its cash rate back to 2.5 per cent. It presumably believes it can do this without materially adversely impacting the economy. This would mean raising the cheapest discounted variable mortgage rates up to around 5 per cent.

This column’s view is that a record, 15-25 per cent decline in Aussie house prices, coupled with rapidly shrinking superannuation balances, will persuade the RBA that there is merit in pausing its hiking cycle to assess the impact of these changes on household behaviour.

The latest futures market forecast for Australian interest rates is presented below:

Futures Market Interest Rate Forecast

Fastest rate rises in Australia’s history.

As you can see, the market is tipping a 3.8% official cash rate (OCR) by December and 4.4% by May 2023. If true, this would push the average discount variable mortgage rate to 7.7% – more than double its pandemic low:

Australian mortgage rates

Fancy a 7.7% mortgage rate?

In its latest Financial Stability Review, the RBA 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”. This was based on a similar model to that used by Coolabah Capital Investments.

Thus, the futures market’s bullish 4.4 per cent OCR would ‘crash’ Australia’s housing market, with real house prices falling by more than 30% in real terms and by more than 35% in nominal terms, under the RBA’s own modelling.

More than $3 trillion of value would literally be wiped from Australia’s $10 trillion housing market.

Unconventional Economist

Comments

  1. More than $3 trillion of value would literally be wiped from Australia’s $10 trillion housing market.

    That $10 trillion is a theoretical number that represents what potential buyers would pay to potential sellers over time if all properties were eventually sold at current market price.
    It represents potential future payments from one person to another person. If we net it out for society overall it is meaningless. This kind of wealth has no value to society.

      • The Wizz of Ozz

        Life is but a ponzi ahem :ponzi ponzi your scheme gently stepping on heads life is but ponzi facilitators dream ponzi ponzi your scheme gently stepping on heads it’s a Fu”cking facilitators dream lololol

      • Like my brother in law threatened to beat the sht out of me when I told him ‘equity’ increasing is not spending money when he was addiment that HPI was real money to be taken out and spent on boats. I told him “No, its just another debt” 10 years later he’s still clueless and still doing it, last time to pay his outstanding tax.

    • Jumping jack flash

      “That $10 trillion is a theoretical number that represents what potential buyers would pay to potential sellers over time if all properties were eventually sold at current market price.”

      Indeed,

      but it also serves another important role.
      Consider that there are currently over 2 trillion outstanding mortgage dollars, compared to that 10 trillion total property value, an LVR calculation of around 20%. A nice, low, safe number.

      Of course the 10 trillion dollars is based on fantasy, but the 2 trillion dollars is cold hard fact. The 2 trillion debt dollars exists while the 10 trillion dollar number can move freely up and down depending on the prevailing conditions and urges of the people.

      The only way the 2 trillion dollars goes down is through the hard slog of repayment of principal and interest, which is actually deflationary, considering that the 2 trillion dollars represents up to 2 trillion dollarydoos that exist somewhere in our economy at this very moment, sloshing around the economy creating demand and being paid to people as wages. They aren’t all locked up in a box.

      So if the total housing stock “value” drops to 7 trillion, or to 5 trillion, what will that do for the banks if the outstanding mortgages are still hovering around 2 trillion, because that 2 trillion dollars isn’t going away very quickly.

    • At fair price, 3 times median price to median income, housing stock going to be 3 time GDP or so. That’s after the recession causes GDP to contract. 1890 Melbourne here we come!

  2. But media is still publishing stories of all these multi-million dollar property auctions going off on the weekend?
    I think people can clearly afford it. The ‘everyone’s a battler’ mentality is wearing a bit thin.

    • Vivian DarkbloomMEMBER

      You’re meant to believe in these fluff pieces that so that you too are comfortable enough to throw yourself into the oncoming freight train.

      PS: Everyone IS a battler once property prices climb beyond the $10M mark

  3. SkepticviewerMEMBER

    We still have the golden visa scheme in operation, mass immigration is ramping up, and dirty money needs somewhere safe to go now the spotlight is on the city. Interest rates only affect you if you borrow. Those with cash don’t care and all those new landlords now on their way will pay any price as they know more new landlords will follow them. Then there are those purchasing for air BNB and to accommodate the exploitable construction workers and farm workers. Price falls, for some of the disintegrating investment properties located in areas of high social decay there may be a drop. – I don’t see a riot in home prices.

  4. If China does finally set up its touted iron ore platform and collapse prices, a story that has been around for many years alongside a housing crash ( or is that the New Zealand headline wording ) Australia will be back with the dinosaurs quicker than most. In other weekend news Macron set to lose majority (unexpectedly).

  5. I once asked a Banker about what the “inherent” value of a house is, i.e. when all is said and done, what is the floor price I could sell my home for. Their response, “whatever the market can bear”. Some honesty I thought. My response, “I’ll assume it is worthless, then I can plan accordingly”.

  6. I think you mean 30% nominal, and 35% real terms right Leith?

    And $3 Trillion of “Illusion” wiped from our housing market is probably more accurate a word than “Value”

  7. pfh007.comMEMBER

    Look on the bright side.

    At least we will have learnt that trying to run economic activity on the fumes of bank credit pumped into the prices of the existing housing stock is not very smart.

    Now we can fix teh thing.

    • Vivian DarkbloomMEMBER

      The ‘we’ you are referring to is a very small minority that considers itself heterodox. The more general ‘we’ has not learnt anything yet. In fact, I would go so far and say that that ‘we’, through its elected and unelected representatives, is frantically sniffing for more credit fumes to keep the party going.

    • ErmingtonPlumbingMEMBER

      I’ve got a mate who’s business is going very well with a couple of kids in their late teens and early 20s and was talking to me about getting them into an investment property together.
      You do know we could be looking a a massive drop in prices over the next 12 to 18 mths I said to him.
      Its not really going to drop that much he says and anyway “it’s time in the market not timing it”
      OK then I say.

      Another customer I have is trying to sell one side of his newly constructed duplex (he lives in the other side) and now regrets knocking back a price 3 weeks ago that he can no longer get another customer to offer (1.7mill I think)
      He tells me he doesn’t want to take less than what he’s already been offered.
      When I told him some commentators are predicting over 30% falls in prices he looked at me with this dumbfounded, pale faced expression.
      They couldn’t drop that much he said sounding unconvinced with himself.
      I Hope he’s still got enough cash leftover for the out door toilet, sink and BBQ area he wants me to plumb up
      😬

      • “it’s time in the market, not timing it”

        That expression – so often quoted in these fragile days – infuriates the daylights out of me!
        Simply by delaying selling/making a decision, the issuer of that quote is doing exactly what they think they aren’t – trying to time the market – also known as “prices always go back up (given time), they always have and always will”.
        Leaving the market today – whatever market we are talking about, is probably the smartest move anyone with sense, could make.

        • Jumping jack flash

          At the other end of the spectrum, we should be hitting a capital city median property price somewhere in the vicinity of 10 million dollars sometime around 2050.

          I always said that if we were to continue the “double every 7-10 years” rule of thumb, then what would wages/interest rates need to be set at to enable people to borrow 95% of that much money?

          And then we promptly hit the lower bound on interest rates.

          But with the help of a couple of trillion stimulus dollars, for a moment it really looked like we were going to start the “controlled hyperinflation” we needed to keep the property prices growing at the expected rates.
          It was all go. 2050 and 10 million dollar properties, here we come!

          And then of course the dream was over before it had really started, and in a flash of rising interest rates, we suddenly got what we have right now.

  8. DingwallMEMBER

    https://www.dailymail.co.uk/news/article-10931279/Thousands-teachers-nurses-help-buying-home-780million-NSW-Government-scheme.html

    What is it with these f^&kwits? We have problems with housing affordability, power costs etc, and all these idiots can think of is to throw subsidies at the problem (at a cost to the taxpayer) to continue to maintain high prices. Imagine if houses were affordable and our taxes were used to improved hospitals, green space planning, innovative industry etc etc etc.

    This is why I want house prices to really crash soon. Hopefully no more Australians will be politically enticed into the market by this bullsh!t.

    • Premier Dominic Perrottet says housing affordability IS BECOMING a challenge for families across the state.

      Yeh Dominic. I understand that you are thinking about starting a family too.

    • Just need the wheels to fall off sufficiently hard that all the easing and government gibs in the world won’t help because banks aren’t lending to anyone at all.

      One can dream…

  9. Now we can fix teh thing
    Have you learned nothing over the last 20 years.
    The middle of a Housing price collapse is not the time for bold economic experiments, we’ll ( the real Aussie we
    not you and me) will have a crises to deal with, their grey beards will all gather and conclude that it is time to return to our economic roots (stick to our knitting), Housing ponzi, Population ponzi, Capital ponzi ….all the schemes that we have experience managing, and if I do say so we’re damn good at managing, they have over 30 years of history and have never made a significant misstep. This is the mindset of the “we” that’s in control.
    By contrast the “We” set that I belong to thinks we (all of us collectively) passed the point-of no-return a long time ago, today there’s just no avoiding our fate.
    Australia will become another failed state.

    • BornwildMEMBER

      haha you are underestimating the psychological anguish for all those people who thought they had joined the million dollar, 2 million dollar etc club only to find themselves thrown out of the club before last drinks. I have a workmate who bought a property at the start of the pandemic for 700k and a year later was saying it was now valued at over 1 million. A 30% drop takes him back to just his purchase price. He will be about even… but pain of the fall will far exceed the joy experienced during the rise.

  10. Mike Herman TroutMEMBER

    I was excited to see the Herald Sun running a story on Melbourne’s best and brightest real estate agents under 35. Just who are these brave dealmakers? We are at peak stupid…. only one way to go from here….

    • Hopefully they will fill the gap in late night service stations, ie equal worth or more to society for a more realistic wage. ie minimum or less.

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