Shane Oliver: Prepare for 20% Australian house price falls

AMP Capital’s chief economist, Shane Oliver, believes that further aggressive rate hikes from the Reserve Bank of Australia (RBA) could drive dwelling values nationally down by 20%.

“We’re just at the beginning of interest rate rises, so there’s more to come, which means more falls in prices,” Dr Oliver said.

“Buyers’ capacity to pay is dwindling rapidly, at the same time confidence is collapsing as a result of higher interest rates talk. As property prices start falling, it feeds on itself. So, we’ve got falling prices feeding weak demand.”

It is worth remembering that the RBA’s own modelling estimates “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 suggests that if the median economists’ forecast of a 2.85% peak official cash rate (OCR) comes into effect, then real Australian dwelling values would suffer a peak-to-trough price fall of around 20%.

The futures market’s forecast of a 3.5% peak OCR would drive real housing prices down by around 25% in real terms under the RBA’s modelling.

Ultimately, how far Australian house prices fall will depend on the RBA’s tightening.

I personally can’t see the RBA hiking much above 2% for the simple reason that Australians are so heavily indebted and sensitive to rate rises. I also believe that an OCR of 2% would be highly contractionary, and we will probably see the RBA cutting rates in the second half of next year in response to heavy house price falls, a stumbling economy, and moderating inflation.

Unconventional Economist

Comments

      • If it gets to 20% I don’t think it will stop there. Particularly if the investor cross collatoralisation start to unwind…

        • Actually, I think the investors may save the market, there is an existing rental shortage already, current house prices fuelled by home owners; if prices fall, yields rise. Getting the requisite debt financing may be difficult though.

          • 2023HomelessMEMBER

            Hot tip. Every house market I have tracked unwinding has a rental shortage before prices fall. As they drop, vacant houses appear, household formation slows, people loose jobs and move back home or in with others. The shortage is always a mirage. Especially when we have had home builder and no immigration for 2 years! Plenty of stock was built. It will turn up soon enough.

          • ErmingtonPlumbingMEMBER

            The rate of Immigration will be the deciding factor on how far it’ll fall in Sydney and Melbourne.
            A return to large numbers with builder Bankruptcies will Intensify a rental shortage.
            Can they maintain high immigration if unemployment starts Soaring though?

    • Paul TuckerMEMBER

      Precisely. Who cares if house prices fall? They should never have risen so much to begin with.

    • He has a very poor track record.
      Over the last couple of years his analysis and forecast are not just wrong but the complete opposite.
      Don’t think highly of AMP either.

  1. His 2020 prediction was accurate – if you turn the graph around!
    And in any case why is a 20% fall a bad thing anyway? They went up by squillions for not much reason so going down to something they should never have gone above seems reasonable.

    • DingwallMEMBER

      Australia does not deal in reasonableness, fairness or mateship anymore. House prices going up is cheered while declines now wreck the economic house if cards we have built

  2. BoomToBustMEMBER

    If interest rates approx double, how could this only lead to prices dropping 20% ? If we are headed for recession then it would be inevitable that they drop significantly further.

    • Maybe because it is de rigeur to take catastrophic problems that will affect 5% of the population and extrapolate across 100% to create a good headline? Yes, mortgage payments will go up. Yes, some people – particularly those that look at property price trend lines rather than year on year – are in for a shock. Yes, people who have only ever known low interest rates and borrowed as much as they could, are about to learn what the “rates can go up and down” disclaimer really means. But in reality, most people will get on with it. Except your favourite barista. He’s farked.

  3. MathiasMEMBER

    I reckon Australias going to turn on its own people someday.

    Canberras becoming its own Tribe.

  4. “I also believe that an OCR of 2% …”
    I believe in world peace and harmony.

    • “I also believe that an OCR of 2% …”
      I believe in world peace and harmony.

      I believe in God the Father Almighty, Maker of heaven and earth.
      And in Jesus Christ, His only Son, our Lord; Who was conceived by the Holy Spirit; Born of the Virgin
      Mary; ….

      For me there’s just no limit to the things that people of faith will profess to believe

          • I believe it was Jack Welsh who started the whole idea of identifying and characterizing top 10% and bottom 10% of every section of the company.
            Top 10% got massive bonuses, bottom 10% got shown the door
            Might work well in theory but within engineering development it was absolutely the kiss of death, best way known to kill your team’s productivity and inventiveness.

  5. Goldstandard1MEMBER

    20% is just the beginning. If it gets there, it will go 40% for sure due to economic fallout with jobs and businesses gawn…..possibly a bank or two also.

        • Looking forward to the CBA rebranding to ‘The Commonwealth Bank’ post it’s imminent nationalisation, oh and buying houses with gold bars and barter, should be interesting……

          • ErmingtonPlumbingMEMBER

            Property is the new gold
            Though we will need to see changes to land release and zoning laws to allow for small transactions.
            That tank of petrol will be 100mm2 thank you.

  6. AnnualizeTHIS

    “Shane Oliver: Prepare for 20% Australian house price falls”

    5 years supply of popcorn: check

  7. It’s Labors fault!
    No it really will be as they have failed to enact suitable policy. #oneterm

  8. pfh007.comMEMBER

    Imagine how much worse this will get if the ALP are unable to flood the labour market with imported labour and get the unemployment rate back above 5%.

    An over night rate of 3-4%?

    For sure wage indexation does not exist anymore but it is hard to drive a hard bargain with the grunts when they know no-one is responding to job ads at the current pay rate.

    Soon it will not just be the lousy farmers and cafe owners begging for plane loads of cheap labour.

    Wont someone think of the employers forced to compete for workers!.

    The horror.

    • Deliveroo from the cafe kitchen to the cafe table. No extra staff, and cheaper per hour than an employee. Problem solved.

    • lol, where are all these immigrants going to live? Rental markets are tighter than a frog’s ass.

      So all these people are gonna come work min-wage jobs and live 3hrs commute away?

      Nah dawg.