Rate hikes didn’t slow the market. But that doesn’t mean cuts will have no affect.
One of the interesting puzzles in the property market post-Covid is just how resilient property prices have been in the face of the massive bombardment of rate hikes.
As rates go up, that typically reduces how much people can borrow, and house prices tend to fall.
And they did fall a little bit. But then they went up and now they’re pushing past their most recent peaks to all time highs.
All without any support from rate cuts.
This is a bit of a puzzle.
CBA’s head of Australian economics, Gareth Aird, put his head to the puzzle the other day. He notes that it’s not just prices but rents that have soared, which suggests that the shortage in property is more fundamental.
“Dwelling prices have now risen by 10.7% since their cyclical trough in January 2023.”
“Indeed, national home prices now sit 1.8% above the previous cyclical peak of April 2022, which was reached on the eve of the RBA’s tightening cycle”.
“In less than two years the RBA has increased the cash rate by 425bps. And yet national home prices have risen over that period”.
“It is unusual to see price outcomes diverge from such a big deterioration in housing affordability. For context, home borrower capacity has fallen by ~30% due to the RBA’s rate increases.”
They key to understanding it is the lift in immigration and the strong growth of the population:
“The upward pressure on home prices stems from the big imbalance between the supply of new homes and the surge in Australia’s population.”
“Home building has simply not kept pace with the massive uplift in population, primarily driven by net overseas migration”.
“As a result, vacancy rates have dropped to record lows in most capital cities and the rental market is hot”.
“This dynamic has seen renewed interest in housing from all buyer segments over the past year: owner-occupiers, investors and first home buyers”.
Not only is the domestic market in chronic shortage, but foreign demand is picking up too:
“Foreign buyers are also more active in the market. According to the latest NAB residential property survey the share of total market sales to foreign buyers in new housing markets increased for the fifth straight quarter. New sales to foreign buyers hit a 6½-year high of 10.1% in Q423”.
So that’s how we got here. It’s not a money story. It’s a number-of-humans story.
The question then is, where do we go from here?
Well, rates have peaked and are probably going to come down in fairly short order from here.
But rate cuts will still increase people’s ability to pay. They will work the way they’ve always worked.
Which means that as rates go down, property demand goes up.
And so will prices.
JG.