What actually is driving house prices right now?
Something just doesn’t feel right.
I mean, all the property price indicators are consistent. They’re showing us that things are on a solid run now.
Capital city house prices grew 3-4% over the past quarter. That’s consistent with double-digit growth?
And pretty much every expert in the country right now has written off the prospect of another dip in house prices.
But no one’s exactly sure why.
Because on all the old rule of thumbs house prices should have fallen further.
I mean, just on interest rates alone – and the most aggressive rate hike cycle in Australia’s history – prices should have come off more than the piffling 5 or so percent, (before bounding right back again!)
Mark Bouris from Yellow Bring Road agrees that it certainly is strange Mr Watson.
“I’ve been around for a long time and I’ve never seen interest rates rise as quickly as we’ve seen in the past year, without adversely impacting house prices”.
“Based on previous cycles, I expected house prices to cave in, which they did initially”.
“What surprised me is the lack of properties that have been put on the market for sale, which is the main thing that spurred the recovery”.
“The lack of supply tells me that people don’t have to sell because they still have a job, and as a result of not having to sell, higher interest rates haven’t yet put pressure on prices.”
Even the fixed rate reset – which saw a slew of borrowers resetting from ultra-cheap fixed-rates to much, much higher variable rates – has turned out to be a bit of a nothing burger. So far, and we’re a decent way into it now, it hasn’t resulted in much more stock coming onto the market.
Maybe the banks headed that one off at the pass:
“I think the mortgage cliff remains a concern, but so far, it hasn’t resulted in a large number of defaults as some people were expecting,” Mr Bouris said.
“The banks have been quite aggressive in retaining their fixed mortgage borrowers, so they’ve been more willing to offer remedies than expected, such as changing repayments to interest only, extending loan terms or offering rate discounts, which helped property owners manage the large interest rate increases.
But the fact remains that interest rates are 400 basis points higher than they were just a year or so ago.
And that has had a big impact on borrowing capacity. According to AMP chief economist, Shane Oliver, borrowing capacity has decreased by around 30%, which should have resulted in significant price decreases. It should have resulted in SOME price decreases:
And sales volumes are much lower (volumes and prices tend to move together).
So this is not your usual market. Not by a long stretch. It’s very unusual.
And what explains it all?
If I had to have a stab I’d say immigration. Immigration has come storming back and is super-charged right now. I saw one analyst say we’re on track for 675,000 this calendar year (180K might be considered normal).
That’s fuelling epic rental shortages and soaring rents. That’s changing the equations facing investors, and it’s forcing new buyers to dig deep into their pockets to escape a rental market that is quickly becoming Australia’s version of the hunger games.
And maybe that’s enough to turn the old rules of thumb on their head?
Maybe.
But with house prices growing this strongly right now, whatever puzzles remain, I wouldn’t be betting against them.
JG.