The SMH’s Jessica Irvine believes Australian house prices won’t rebound strongly following the current price correction for the simple reason that the 30-year decline in interest rates is over, meaning borrowing capacity will remain hamstrung:
You can only pay for a home what a bank or other lender is willing to lend you… The lower the interest rate, the more you can borrow on a given income and level of living expenses.
And for the past three decades at least, rates had been trending in one direction: down…
Today, Australian housing debts sit at record highs compared with income. Why? Because every time the central bank made it cheaper to borrow, we went out and leveraged to the max to feed our property desires. And literally no policymaker saw fit to stop us…
We’ve recently struck the limits of how low borrowing rates can go…
Having hit a floor of almost zero per cent, there was only one direction for official interest rates to go: up… Borrowing capacity has been reduced…
We’ve hit the so-called “zero lower bound”, not only for interest rates but for future rapid increases in home values, too.
I can see Australian house prices entering another bull market from late 2023. By then, the Reserve Bank will likely have started slashing interest rates in response to the global (and potentially the Australian) economy falling into recession.
In addition, Australia will very likely see record immigration flows from next year at the same time as dwelling construction rates are suppressed. This will drive rents higher, which will make buying a house to live in or as an investment more attractive.
As for the longer-term, the trajectory of interest rates is uncertain.
Jesicca Irvine is right to state that the official cash rate recently hit a “zero bound” at just 0.10%. However, there is nothing to stop the Reserve Bank from taking rates negative in the future, as occurred over recent years across Europe and Japan.
While negative interest rates seem implausible given current inflationary conditions and the hawkish stances of central banks, a lot can change over a five or ten-year period.
A decade ago, few people would have thought that rates would go negative across Europe and Japan, nor hit 0.10% in Australia. But they did.
Therefore, we shouldn’t rule out the possibility of negative interest rates in Australia sometime in the future, which would provide tailwinds for house prices, just like the past 30 years.
Expect the unexpected.
