Another house price boom is coming. And it will be the RBA’s fault… again.
The RBA’s own research predicts that house prices are going to jump 21% over the next 18 months.
Well, officially, they weren’t quite so bold. But that is pretty much what they’re saying.
It all comes from an academic paper written by two of their senior researchers.
Trent Saunders and Peter Tulip recently published an analysis of what impact the rate cutting cycle between 2013 and 2017 had on house prices.
Remember this was a time when official interest rates nose-dived from 4.5% to 1.5%. At the same time, house prices in Sydney lept over 50%.
Now I would of thought the connection was pretty obvious, but that’s life as an academic isn’t it? – getting paid to tell people what they already know.
But remember that this was also at a time when the RBA was telling everyone that their rate cutting agenda wouldn’t inflate house prices. If house prices were rising, it was due to a shortage of supply, and strong population growth.
Sure. Those things matter too. But interest rates are the biggest story here right?
In fact, according to the research, interest rates are almost the only game in town.
Saunders and Tulip reckon that almost all of the house price boom between 2013 and 2017 came from interest rate reductions.
They also showed that housing supply and population growth had relatively little influence on the overall picture.
And they didn’t stop there. Saunders and Tulip also put some numbers on their thinking. On their reckoning, every 100 points of rate cuts translates into a thumping 28% increase in house prices.
Think about that number. The RBA always moves in 25 basis point increments, except in emergencies.
So with just four official rate cuts – only four – you can create a 28% increase in house prices!
It’s maths mother-family!
And what’s happening right now? Well, funnily enough, the RBA is cutting rates.
We’ve had two already. The market consensus is that we’ll finish the year with three rate cuts under the belt.
Assuming it’s linear, that means we’ll get three quarters of the Saunders and Tulip figure.
So those three rate cuts should give us a 21% increase in house prices.
Twenty One flipping percent!
That’s a boom baby.
But the RBA is still running with the line that interest rate cuts won’t inflate the housing market… officially. That’s the official line. That’s what Governor Phil Lowe is saying.
But hang on. Isn’t that contradicting Saunders and Tulip?
Yes. Yes it is.
But there’s this nice story the RBA tells. They say their researchers are doing independent research, and their views “don’t necessarily represent the views of the bank.”
… even though the researchers are getting paid by the bank and have to spend the rest of their careers working at the bank. But yeah, no, sure. Totally independent research.
I actually reckon this is a cry for help.
The RBA copped a lot of flack during the last boom for letting house prices run so far. And it’s about to happen again.
The RBA is calling out from support – especially from Canberra. They’re saying, “There’s another house price boom coming. If you want to stop it, you need to help us out. Stop asking monetary policy to do all the heavy lifting. Get the cheque book out and start spending yourself.”
And Canberra is like, yeah, nah, we’ll take the house price boom thanks. Makes us look good.
And the RBA cries little tears of helplessness.
While all around them, the housing market booms.
(You heard me right..? Twenty-one percent..?)