Coolabah Capital’s Chris Joye believes the Reserve Bank of Australia’s (RBA) aggressive interest rate hikes have broken the housing market, with prices falling abruptly after the initial 0.25% rate hike in early May:
The first RBA cash rate hike in May 2022 broke the Aussie housing market: there is a striking structural change in the pace of house price declines that coincides almost exactly with the RBA lifting its cash rate by 25 basis points in May. Following the super-strong jobs data during the week, the RBA is now all but certain to hike rates by 50 basis point for an unprecedented third consecutive month in a row in August. This will mean that variable-rate mortgage costs will have increased by a seemingly incomprehensible 175 basis points (or 1.75 percentage points) in just three months (or over four RBA meetings)…
House prices on track for record 15-25% fall
According to Joye, Australian house prices are “on track for a record 15% to 25% fall”, the extent of which will obviously hinge on how high the RBA hikes interest rates.
Remember, the median economist forecasts the official cash rate (OCR) to peak at 2.85% mid next year, whereas the futures market is currently tipping the OCR to peak at 3.5%.
If either scenario came true, it would see the average discount mortgage rate balloon to 6.2% (economists’ forecast) or 6.8% (futures market’s forecast) – both a massive lift on the 3.45% average discount variable mortgage rate that existed in April 2022:
Economists’ forecast (dashed red line); market’s forecast (solid red line).
The RBA’s modelling estimated “that a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15% over a two-year period”.
Thus, the economists’ forecast 2.85% OCR infers a peak-to-trough decline in real Australian house prices of around than 20%, whereas the futures market’s forecast 3.5% OCR would push Australian house prices down by around 25%.
While Chris Joye’s house price forecast may sound alarmist, it is consistent with the RBA’s own model.
