Energy war-profiteers to wipe $2 trillion from house prices

The Australian property market is worth $10tr. Here is what is coming to it. Chris Joye:

What the RBA giveth, it now taketh away.

Slashing its cash rate from 1.5 per cent to 0.1 per cent between June 2019 and November 2020 boosted Aussie house prices by 37 percentage points. A prudent person should now assume that much of this wealth creation is paid back.

Despite Martin Place not being able to accurately forecast its next step, it somehow has the conviction that the cash rate should climb to what it judges to be a “neutral” level around 2.5 per cent. The truth is the RBA has zero clue where neutral actually lies and it would be well-served by some humility on this front.

For crazy-brave housing bulls and home owners across the country, the scary thing is that our forecast for a 15-25 per cent decline in national prices was predicated on the RBA lifting its cash rate by at least 100 basis points.

And yet the plan, according to governor Philip Lowe, is to leap to 250 basis points. We have not revealed what we think will happen to house prices if the discounted variable mortgage rate does indeed lift from circa 2.25 per cent in April this year to 4.75 per cent next year.

I will do it for him. In Coolabah’s house price model, every 100bps move in interest rates delivers a 20% (+/- 5%) move in house prices. It is road tested over many cycles.

In normal circumstances, I would be confident in predicting that the first 100bps and circa 20% fall in house prices would be more than enough to force the RBA to pause and probbaly end its tightening cycle. A $2tr wealth hit to households is plenty to drop consumption and inflation.

That has been our base case for some time now. It would be an exaggerated but normal cyclical correction within the politico-housing complex economic model.

However, we are not in Kansas anymore.

Thanks to the Albanese Government’s suicidally inept (or corrupt) handling of the war-profiteering energy crisis, we are going to see a much stickier CPI than in the old economic model.

As I noted last week, an additional $50bn in energy costs will be drip-fed onto every business and household east of WA over the next year. This will lift the CPI by 3% before anybody tries to pass on the cost. When they do, it will be more like 5%.

This raises the distinct possibility that critical components of Core Inflation do not fall at the pace the RBA is used to during cyclical downturns and it keeps lifting interest rates past levels that the structure of the politico-housing economic model can take. This looms very large after last week’s RBA madness:

Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.

Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today’s increase in interest rates will assist with the return of inflation to target over time.

In short, if we see a 2% cash rate, with the second 100bps the direct consequence of Albo’s protected energy war-profiteers, then the house price correction is going to double in scale to 40% +/- 10%. The wealth hit to households will be $4tr. $2tr is directly attributable to Albo’s energy cowardice.

The scale of such losses is a structural adjustment to the economic model itself.

Gone will be the “houses and holes” economy that earns income by selling dirt to the world, then leverages that income in global markets to inflate house prices that drive demand for services.

In its place will be the “holes and hollow” economy that pays the world to take our dirt, while it charges us ever more to borrow, and inflating our demand for services is no longer possible.

If Albo’s energy war-profiteers are allowed to continue, the “holes and hollow” economy will look like this:

  • the end of all but publically-funded manufacturing;
  • capital-constrained banks with structurally lower capacity to lend;
  • $4tr in housing wealth gone with the mortgage debt overhang intact;
  • the end of lifestyle consumption, and
  • mining in complete control of the nation.

By enabling energy war profiteering, the Albanese Government does not appear to have the slightest clue what it is messing with.

Houses and Holes
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Comments

  1. I think it’s time to accept that private debt creation has run its course. Highest private debt to GDP in the world. Rates in Australia and everywhere should never have been allowed to go to zero or even ridiculously to negative. Talk about flogging a dead horse. It just resulted in ridiculous asset price increases resulting from money costing nothing. Major misallocation of capital.
    Leave rates around 2% and expand the money supply through government deficits funded through the RBA. The recent bout of inflation has arisen from a number of factors but the huge government stimulus funded with QE happened at the same time that private debt was also expanding significantly. They shouldn’t have dropped rates to zero and THEN started printing. Leave rates high enough that investment decisions are taken seriously and so that deficits/QE are used to maintain or reduce private debt to gdp.

    • pfh007.comMEMBER

      “.. I think it’s time to accept that private debt creation has run its course..”

      It certainly has but it will take a long while before the news gets through down under where every shiny penny has their undergraduate notes on deregulated bank credit creation and the primacy of independent monetary policy in the family shrine.

  2. The property correction has already hit our street one property dropped their price in less than a month on the market by 30%.

    RBA has 0 control now. (They’ve set off the death spiral)

    Holy moly, it’s really on and Albo and Co. are more worried about Corporate Welfare than Australia’s welfare. (Or they are clueless … really?!)

    This is going to be an epic crash in Australia, after 20 years … here it is.

    F**K.

    • DingwallMEMBER

      Lol 20 years of ever increasing prices to stupidity levels just cannot continue.
      I cannot blame the RBA although the rate of their dropping rates and upping them is debatable. I blame our governments …. they want house prices to keep going up at the expense of all else. That means their policies (including their directions etc to the RBA), dealings with lobbyists, banks etc etc all support this sh!te. The RBA are just caught up in the whole F’ing mess. Imagine if house prices were consistently at a reasonable level and Australians were not mortgaged to the hilt versus wages with expectation of tonnes ot gold at the end of the rainbow.
      Albo and co need to fix the root cause………….. sadly they won’t.

  3. Via Katharine Murphy, Bowen won’t tolerate energy market “manipulation” and his big plan will “decarbonise” the economy. Plus Albanese is a big picture “empath”. Against this lovely Guardian narrative, who cares about real-world holes and hollows?

  4. i will believe it when im looking at. ive lost money shorting the greatest housing bubble in all of human history. i underestimated vested interests and human greed. i wont do that again. they will do everything they can to prop this basket case up. i have no views on this, just trying to learn from my mistakes. long gold, guns and ammo?

  5. The Travelling PhantomMEMBER

    After Scomo won prices jumped immediately 650k became 690k…same place resold in post covid euphoria 800k…
    All this talk about prices change hasn’t materialised yet and still in the realm of paper prediction.
    Another anecdata a place asking price 750k to 800k in urgent need to fix roof, change carpet, paint, and update kitchen etc….sold 840k so people still willing to pay above asking price!! Not to mention good luck to find material for renovation

  6. Luckily literally noone will make that connection. At all.
    These are the same people refusing to make a connection between immigration, low interest rates to house prices.

    • Agree on the 2nd point, they don’t care seem to care when the prices shoot up.
      But, once they are dropping, the natural reflex says “Labor’s fault”.

  7. reusachtigeMEMBER

    Life won’t be easy under Albanese!!!

    I hope you win with all these warnings and help boost housing into its next extreme major ribald boom by getting the rates even lower. Youse are property legends!!

  8. Fishing72MEMBER

    My brother -53, has Parkinson’s, still works as a gardener, rents in Sydney , – just received a letter from his energy provider telling him his power bill will be going up by approximately 45% by Christmas.

    People are going to hurt.

    • Diogenes the CynicMEMBER

      That is total bollocks. I think my power prices in WA are going up by 2.5% in July. That is what a normal system looks like. WA has:
      1. A capacity market ie there is standby generation always there in case of a market disruption (we had a nasty disruption in 2008 when Varanus island facility went down)
      2. Gas reserve – 15% of any gas project has to be sold in the domestic WA market
      3. WA Govt still owns a lot of generation assets in Synergy which means it can keep them operating even if they are making losses due to fuel costs.

  9. The Traveling Wilbur

    By enabling energy war profiteering, the Albanese Government does not appear to have the slightest clue what it is messing with.

    Jebus. You’re never happy are you — not even when you know this is just all part of Labor’s cunning plan to end the housing-affordability crisis.

  10. The Grey RiderMEMBER

    Realistically this has to happen…did anyone really believe house prices would continue to increase geometrically and the average household income would be $1M in 20 years? It’s time to lop off some zero’s to get these back to more manageable numbers.
    It’s a controlled demolition…at this stage.

    • More like the Canberra Hospital explosion fckup than a controlled demolition, I think.

      These people have no idea what they’re doing. Rates should never have got so low, and now they’re going to whipsaw in the opposite direction.

    • pfh007.comMEMBER

      “…. did anyone really believe house prices would continue to increase geometrically and the average household income would be $1M in 20 years….”

      It appears that some did…….chortle.

  11. Holiday In ScomodiaMEMBER

    Ok, launching interest rates, sky high energy, increasing cost of everything SHOULD clean out the craziness in the housing market. Just like a global pandemic downturn (and the GFC before it) SHOULD have weeded out the weak/frivilous business models and the overleveraged speculators and offered a chance for true nation building through sensible government spending setting us up for a decent sustainable future. Instead the sky went black with kitchen sinks. Why won’t it again? Noone is thinking creatively enough IMHO… Thinking caps on… Albobucks©️, mangling super to allow your ind/retail fund to coborrow with you/equity inject (plus ramping existing deposit schemes), Govt mandated mortgage default moratoriums, legislation changes to allow easier recapitalisation of arrears (45yr loans abyone?), TFFs to shelter Aus banks from global rates and keep lending cheap, the govs buys all the non profit loan tranches, launch immigration to the moon, housing buyer visas, RBA giving out direct no interest deposit loans, back burner social housing projects and maintaining hellishness of renting while watering down lending standards to keep the desperatation of lemming into bottom rung of thing…. teh thing fixed.

    • All these aren’t going nowhere until you state what the expected inflationary impacts of each policy is.
      These are all a possibility when inflation is nailed to the floor like last decade.
      What are they and how do they not just end in rba raising rates more? Without that question answered, these policies are dead on arrival.

  12. pfh007.comMEMBER

    “.. The wealth hit to households will be $4tr. $2tr is directly attributable to Albo’s energy cowardice..”

    Real Wealth!

    Quick tell everyone to sell their real wealth assets and park the loot in smashed avocado futures where it will be safe……..a bit of lemon juice will stop it going brown.

  13. DingwallMEMBER

    So happily added a lazy $5T or so probably and lots of people complaining of the high costs of housing …… in the top 10 highest in the world.
    Now it’s back tracking $2T …………. and probably still in the top 20.
    Time to get it to the average…………..affordable, livable ………….. make people invest in real stuff

  14. I have been waiting for this for over 5 years and even up to 10 years ago I couldn’t quite come to grips with where we were heading.
    Frankly, IDGAF anymore.
    Unfortunately my kids will feel the pain of any IR increases and accompanying economic fallout. I will backstop them as much as I can but it means I won’t enjoy the retirement I ever envisioned.
    I would dearly love to see some of the protagonists of this system really pay but I know it won’t happen.
    Bring on the Great Reset.

    • Oh Totes where art thouMEMBER

      I share your perspective. I never thought the can could be kicked this far down the road. I don’t have rich family to leverage so I’m probably screwed all the way down.

      I want Angry Albo Tory Slayer back.

    • Mining BoganMEMBER

      Concur.

      All a collapse will do now is bring the heavily indebted back to the world of sh!t everyone else is dealing with.

      But like I’ve always said, sh!t for everyone makes us stronger. Something like that.

      • DingwallMEMBER

        Reckon the Government should let it run then reimburse late mortgage holders (particularly the poor FHB’s they enticed into this market with more grants) with super-profit taxes on gas (or preferably real estate investors). Then work on ridding the embedded housing investment culture and greed we have created

  15. Tassie TomMEMBER

    I think the RBA has been doing something interesting in the last 20 years,

    Traditionally the point of raising interest rates is to reduce demand by:
    1) Encouraging savings instead of consumer spending
    2) Discouraging the taking on of debt, debt being money creation
    3) Increasing the value of the Australian dollar, hence slowing the economy by reducing the competitiveness of export industries and import-competitive industries.

    The RBA has been claiming to “look through” house prices.

    However, I suspect that the RBA is raising/lowering interest rates with the single purpose of manipulating house prices. Rising house prices increases economic demand, and falling house prices decreases demand. House prices as a driver of demand is so powerful that it dwarfs the above mechanisms of managing economic demand.

    Once house prices fall a little bit there will be so much demand removed (capacity created) that the RBA will then use interest rates to attempt to drive house prices up again.

    Next time the RBA cuts rates I’m buying property, and then I’m selling it as soon as the bond markets indicate that the RBA is about to raise rates. That’s because property is not just a by-product of the RBA’s game, it IS the RBA’s game.

    • It’s disingenuous of the RBA to suggest they don’t control house prices when the primary mechanism for expanding the money supply is by encouraging ever larger mortgages through lowering interest rates. Haven’t seen a rush by big business to borrow money as rates have fallen. Maybe a rush by peeps to use their housing equity as collateral for a business loan or as a piggy bank to buy a new SUV.

  16. bolstroodMEMBER

    Is this the Great Reset ?
    I don’t think so.
    After a life time of thinking the system is cooked beyond all repair, it just keeps bounding along .
    I have been proven wrong so often in the past I will not be beguiled into believing this is really it.
    The last bear in the forest is leaving.

    • Absolute BeachMEMBER

      I’m still here Mr. Bolstrood. Growling in anger at the stupidity of the WEALTH EFFECT and ZIRP. It was always going base over apex eventually.

  17. Ronin8317MEMBER

    Rent tracks house prices down as well. When rent comes down by 20%, a lot of household will end up being better off even if they pay double for electricity.

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