Against the odds, Australian house prices continue to bounce back in the face of ongoing interest rate rises.
CoreLogic’s daily dwelling values index has bounced 0.5% since bottoming on 7 February, driven by a strong 1.1% rise across Sydney:
In his weekly market update, AMP chief economist Shane Oliver gives his thoughts on why he believes “the current bounce will be short lived”.
Oliver notes that the current bounce has been driven by “a bunch of positives for the property market”, namely “the rapid return of immigrants and foreign students; very tight rental markets; a 9% plunge in prices which is the biggest fall since 1980 on CoreLogic data which may have attracted bargain hunters not so impacted by the surge in interest rates; very low levels of listings; and maybe signs that the RBA is close to the top on rates”.
However, there are still several key headwinds, namely “interest rate hikes are still feeding through for existing borrowers and the fixed rate mortgage cliff is ahead of us all of which could boost distressed selling”.
Moreover, “numerous economists still see the cash rate rising above 4%; the hit to buying capacity (of around 25% for a buyer with a 20% deposit and average full time earnings) remains even if rates have stopped rising; the Australian economy is likely to slow sharply in the year ahead resulting in rising unemployment; and in past property cycles prices have only bottomed once interest rates started falling”.
Therefore, Oliver’s “base case remains that the current bounce will be short lived as demand from bargain hunters runs its course, the impact of higher interest rates reasserts itself and supply increases in response to distressed selling”.
Although he admits “to seeing the current environment as very hard to read and so admit there is a chance that prices have bottomed particularly if rates have peaked and if the Australian economy has a soft landing”.
The above is a fair assessment by Shane Oliver.
While logically prices should not be rebounding given rising interest rates continues to shrink borrowing capacity, one cannot deny what is actually going on in the market.
Almost everybody other than The Kouk has been caught off guard by the sudden price rebound.
