Four variables that will determine Australia’s house price crash

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Australia’s auction results rallied for the third consecutive week, with the preliminary clearance rate lifting above 60% for the first time since early June after 61.5% of auctions returned a successful result (up 2.0% from last week):

Preliminary auction results

Rebound in preliminary clearance rates.

The rebound nationally was driven by Melbourne, whose preliminary clearance rate rebounded to 65.5%. This was the highest rate recorded since the week ending 1 May (68.4%) – i.e. just prior to the Reserve Bank of Australia’s (RBA) first rate hike.

In last weekend’s roundup, leading Sydney auctioneer, Tom Panos, claimed the market was showing signs of “settling” with vendors now meeting the lower offers from buyers.

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These results certainly suggest a better balance between buyers and sellers – a view shared by Melbourne buyers agent Catherine Cashmore via Twitter:

Catherine Cashmore Tweet

In this weekend’s commentary, Tom Panos explains four variables that he believes will determine whether Australian house prices tank over the months ahead:

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  1. “How aggressive the rate rises are going to be for the remainder of the year”.
  2. “Will listings come on as we normally expect in Spring? There are signs at the moment that this is not going to be the craziest Spring in terms of volume. However, it is too early to call… If not a lot of listings come on to the market, you are going to end up having prices protected”.
  3. “Investors. Investors are actually looking at real estate again. Why? Because yields are going crazy… There’s a rental crisis going on at the moment in most markets”.
  4. “What fixed rates are going to do? There’s already some positivity with certain banks having reduced their long-term fixed rates. And what does that mean? That banks are thinking to themselves that rates are going to go up, but then they are going to start coming down”.

Panos went on to explain that these variables suggest that buyers shouldn’t wait too long before entering the market as prices, in Sydney at least, have already dropped 10-15%. “Because when we start to see the slowest increase in prices again, it’s already too late”.

“If you’re as seller right now, I would probably suggest you come on really, really quickly because you’ve also got to take into account that we are going to have rate rises coming over the next few months, and every time there’s a 1% interest rate rise, there is a 10% borrowing availability decline to a purchaser. They are given 10% less to borrow”.

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In my opinion, the movement in interest rates is the predominant factor that will determine how far house prices fall, with the volume of listings over Spring playing a secondary role.

The pace of interest rate rises is unprecedented and we are in uncharted waters.

If the RBA hikes as aggressively as the more bullish forecasts predict – i.e. a 3.25% official cash rate by March 2022 – then prices will likely fall at a sharp pace. But if the RBA soon stops hiking, then price falls will slow.

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Personally, I can’t see house prices starting to rise until after the RBA begins cutting rates, which probably won’t occur until mid-next year.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.