CBA: Fate of housing market in RBA’s hands

By Gareth Aird, head of Australian economics at CBA:

Key Points:

  • Dwelling prices fell by 0.8% across the eight capital cities in June. Annual growth has dipped to 8.7%.
  • Prices fell solidly in Sydney and Melbourne while gains were recorded in Brisbane, Perth and Adelaide.
  • Our expectation for the RBA to increase the cash rate to 2.10% by late-2022 means that we expect home prices nationally to fall by ~15% by end-2023 (peak to trough). Dwelling prices are anticipated to stabilise in late 2023.

Dwelling prices in Sydney and Melbourne are moving swiftly lower

According to CoreLogic, Australian property prices fell for a second consecutive month across the eight capital cities in June. The 0.8% decline over the month was significantly larger than the 0.3% fall in May. The trend is now established and price falls will accelerate as the RBA continues to raise rates, which is widely expected.

Price outcomes are still divergent across the country. But we anticipate price movements will converge over H2 22 as rising rates both negatively impact the demand for credit across the country as well as weigh on borrowing capacity.

Australian dwelling prices Dwelling prices by capital city

Dwelling prices fell by 1.6% in Sydney, our largest capital city, in June. This is a solid monthly fall and builds on the 1.0% decline in May. A large monthly fall was also posted in Melbourne (-1.1%). Buyer sentiment has turned sharply in Australia’s two biggest housing markets. Prices were also down in Hobart (-0.2%).

Dwelling prices rose across the other capital cities although it is clear that some markets are quickly running out of steam. Prices in Brisbane rose by just 0.1% in June whilst modest monthly gains were recorded in Perth (+0.4%) and Canberra (+0.3%). Dwelling price growth remained strong in Adelaide (+1.3%) and Darwin (+0.9%).

Price growth has now cooled significantly across regional Australia. The CoreLogic regional benchmark index rose by 0.1% in June.

House prices have fallen by more than unit prices over the past few months. This is a reversal of the trend in 2021 when the prices of detached dwellings rose at a faster pace than apartments.

According to CoreLogic total advertised supply in Sydney and Melbourne is now ~7-8% higher than the same time a year ago. Advertised supply is well above the 5-year average in our two largest markets. And turnover has slowed.

Home sales volumes

CoreLogic estimate the volume of home sales was down by 36.7%/yr in Sydney over the June quarter while turnover in Melbourne was down by 18.3%/yr over the same period. Lower turnover has implications for state government stamp duty revenue.

And it will also negatively impact household goods retailing in time as turnover is positively correlated with some parts of the retail basket.

The Australian housing market is largely in the RBA’s hands

In early June we updated our forecasts for home prices based on our revised profile for the RBA (we expect the RBA to take the cash rate to 2.10% by end-2022 and leave the policy rate on hold for most of 2023; 50bps of cuts are pencilled in for late 2023). Our forecasts for home prices are very much conditional on the speed and magnitude at which the RBA lifts the cash rate.

Based on our forecast profile for the cash rate we expect home price falls nationally of around ~15% over the next eighteen months. Prices in Sydney and Melbourne are anticipated to decline by more than the other capital cities (see Table 1 below).

CBA house price forecasts

The expected falls in home prices are significant. But context is key. Price gains in 2021 nationally were extraordinary. Notwithstanding, there are many home owners who have bought recently. These buyers will feel the simultaneous negative impact of both rising interest rates and falling home prices. Deeply negative real wages growth further exacerbates the downbeat feeling amongst many households as evidenced in recent consumer confidence surveys.

The RBA does not target home prices. But the housing market and the broader economy cannot be separated. We expect the RBA to be cognisant of the nexus between changes in interest rates and the impact on home prices, household behaviour and consumer spending and the broader economy. Indeed behind closed doors we believe concerns will mount at the RBA if dwelling prices slide too quickly.

In the long run there are a number of factors that influence home prices; population growth and demographics, supply, household formation, taxation policy, income growth and policies around zoning and land release. But in the short run monetary policy is the key determinant of movements in home prices.

House prices versus interest rates House prices and jobs

The RBA looks intent on front loading the tightening cycle and we expect a 50bp hike in the cash rate next week (see here). But if the RBA takes rates too high and too quickly relative to our forecast profile we would expect bigger falls in home prices. Larger falls in dwelling prices would have a negative impact on the real economy.

The RBA is placing a lot of weight on accumulated savings buffers in mortgage offset accounts to insulate many indebted households from rising rates. But whilst these buffers are positive from a financial stability perspective, households are unlikely to use money sitting in offset accounts to fund discretionary expenditure in an environment of sharply rising interest rates and falling home prices.

The RBA talked a lot in 2020 about the lower structure of interest rates supporting the economy through the normal transmission mechanisms which included “higher asset prices”. Indeed we saw the power of record low rates on full display in 2021 when they turbo charged the demand for credit and national home prices across the 8 capital cities rose by a whopping 21%.

We remarked on multiple occasions over the past few years that it is the percentage change in rates that has the biggest impact on home prices rather than the absolute change in rates. Thus changes in rates are at their most powerful when the rates are very low.

The reverse of what the RBA said in 2020 will also be true when it comes to a higher structure of interest rates and the impact on asset prices, particularly given the very low level of rates we started with. Indeed we expect an acceleration in home price falls over coming months due to further RBA rates rises. We believe the speed and size at which home prices correct lower will ultimately act as a limit to how high the RBA will be willing to take the cash rate.

Unconventional Economist

Comments

    • Because that is the fixed rate. The 0.25% is on the variable that impacts people now.

  1. Hill Billy 55MEMBER

    So by their figures, the overall reduction in prices to the end of 2023 will see prices come back to beginning of 2021 levels. Not a crash by any shape of the imagination. Need a far greater dip to get the property bug off the Australian economy!

  2. Pankit ShahMEMBER

    Castle Hill, Beecroft, West Pennant Hills, Pennants Hills, Cherrybrook, and so many other suburbs in Sydney has a median price over $ 2m.

    $ 2m purchase price with $ 1.6m loan at 5% IR and 20% deposit means weekly repayment of $ 2000. Don’t sure many can pay afford properties in these suburbs. I can understand that upgraders are buying in those area but not all 100% buyers will have cash (30-40-50% deposit)

    • Absolute BeachMEMBER

      Pankit the statement you made is correct. Most owners are not able to pay the $2k a week currently. Make the IR 7% the repayments are brutal. At 10% they are selling their kidneys to raise cash. Meanwhile the money is not being spent in the economy. Jobs start to be shed, then slashed. Eventually the owners will wonder if $2m was ever fair value when that money would have bought a serious profitable farm or business- and yes both come with risks but so did paying stupid amounts for a tiny block in a basic suburb in a crowded city.

  3. It is like CBA is pleading with the RBA not to raise rates too much in these articles.
    Could that indicate CBA runs into problems if the RBA does increase to > 2.5%.

  4. Dave666MEMBER

    Fate of the housing market in RBA hands??
    I thought their mandate was inflation and employment only??
    If true they should not be worried about housing prices or the banks, which is APRA’s problem, right?

    • TailorTrashMEMBER

      Yes it’s a slightly silly idea …….the housing market will always be there …….the issue is at what level the transactions occur………..

    • happy valleyMEMBER

      Ah, yes – APRA, the always the poor cousin, and not up to the task, acceptor of the policy debacles of the elitists at the RBA.

    • happy valleyMEMBER

      Captain Phil single handedly, with the nod of the dutifully nodding RBA board, created this greatest ever housing price bubble and he seems quite happy to create the greatest ever housing price bust, as he likely exits stage right from the RBA after 40+ years in September 2023. Oh, what a legacy?

  5. Some great comments above.
    I can’t see a problem with dwelling values falling – even a lot.
    Some people will take a haircut …….and?
    Some here are concerned increasing IR will suck up discretionary expenditure which will impact the general economy. All I have seen in the last 10 years is that people have bid away their discretionary expenditure capacity (or safety margin) to secure a house – so people in this category are never going to contribute much to our economy anyway.
    If people do lose jobs then we won’t have a labour shortage either – whilst simultaneously reducing the need for immigrants and the negative impact this will have on our ability to provide adequate infrastructure for increasing numbers.
    We should embrace the increase in IR. With a higher deeming rate govt might even save some money on pensions.
    Increasing IR will make poor people poorer but asset rich people will become comparatively a lot poorer.