The Great Housing Debate has taken place between Coolabah Capital’s Chris Joye and economist Stephen Koukoulas (‘The Kouk’).
Taking the “bull” side was the Kouk, who basically argued that interest rate hikes are not a key driver of house price falls, and forecast that Australian house prices will only decline 7% peak-to-trough before commencing a new boom.
Chris Joye took the “bear” side and argued that interest rates are the single biggest determinant of purchasing power in the short-term and, therefore, the RBA’s aggressive monetary tightening will deliver a major house price correction. Moreover, the factors that Kouk cites (i.e. population growth, housing shortages, etc) are longer-term drivers of affordability and, therefore, won’t have much impact in the near term.
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Below are key extracts from the debate summarising the two positions.
The Kouk: “Peak to trough is minus 7%… That assumes 300 basis points of rate hikes from the RBA… So a 7% decline. As we know Australia is not one housing market… My 7% fall is basically linked to Sydney and Melbourne doing a little worse than the average. That places like Perth will probably actually increase because of the mining boom that’s going on there and the fact that the borders have reopened… And the very tight rental market is going to entice a few investors to come out of the woodwork and perhaps step into the lower and middle-priced parts of the markets”.
“So minus 7%. It will probably occur in the middle parts of 2023 to the latter part of 2023… In fact the reason for a 7% decline and not much more than that is obviously interest rates have some impact, not the dominant issue clearly”…
“But when I look at what else is happening in the economy and the borders reopening… The most important thing to me is the strength of the labour market. Here we are with employment booming and unemployment at a 48-year low, and that says to me that the ability of people to maintain their mortgage repayments, even if they are large ones with large rate increases, is much better if you’ve got a job than if you’ve got no job and a small mortgage. And I think that labour market issue is the critical thing that is going to be providing a pretty critical floor under the housing market”.
Joye: “We believe that after the first 100 basis points of RBA rate hikes… we forecast that house prices nationally would fall 15% to 25%. And I guess in contrast to Kouky, in our analysis and all of our research, by far the dominant influence on house prices is mortgage rates and purchasing power”.
“Simple math shows you that if you’ve got a mortgage calculator, and you vary the mortgage rate by 1%, you will adjust your purchasing power by about 13%. And we’ve seen since 2007, that significant interest rate increases have been associated with house price falls and significant interest rate cuts have triggered significant house price appreciation”…
“We think the other variables that Stephen talks about… we think they are very low frequency and static variables. They don’t actually impact house prices much month-to-month, year-to-year… The RBA’s research has shown this… And that’s because those variables – population growth – doesn’t change much. It moves 1% to 2% a year. Housing supply similarly… The big swing factor in purchasing power that does move a lot during certain episodes is mortgage rates”.
“Like Stephen we think that Sydney and Melbourne will fare worst. I agree with Kouky that Perth will be long and strong… I think nationally 15% to 25%. We run the RBA’s housing model… That says 30% fall assuming market pricing for rates, so aggressive hikes”…
“The RBA is railroading towards 2.5% [cash rate] irrespective of what the data says”.
Thus, the Kouk is predicting a larger jump in the cash rate (to 3%) but a smaller fall in house prices (-7% peak-to-trough).
Obviously, I am firmly on the side of Chris Joye. If the official cash rate (OCR) rose to 3%, then this would lift average principal and interest mortgage repayments by a whopping 39% versus what they were in April before the RBA began its tightening cycle:
This represents a dramatic reduction in purchasing power, which necessarily means prices will fall much further than the 7% forecast by the Kouk.
Even the RBA’s own model estimates “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, a 290 basis-point increase in the OCR suggests a real house price fall above 20%.
Surely the pandemic experience proved that the other factors cited by the Kouk are irrelevant in the short-term. Australian dwelling values soared around 35% over the pandemic when immigration turned negative. Why? Because mortgage rates were slashed to record lows, alongside stimulus.
Therefore, pursuing the most aggressive interest rate hikes on record will have the polar opposite impact of driving Australian house prices lower.
Enough of what I think. Who won the great Aussie housing debate? You can vote over at Twitter via the link here.