This really is a strange time in the market.
I’ve been around. I’ve seen a few cycles. But this one is a doozy.
It does have a lot of industry veterans like me scratching our heads.
The puzzle is why have prices boomed right through the middle of an interest rate hike cycle? That’s not what should happen.
Alan Kohler on the ABC Finance Report summed up well last week, saying that the boom in prices, despite the ongoing rate hikes was “unheard of”:
“Here’s a chart comparing this house price cycle with the other two big ones that started in 2008 and 2017”:
“Now this bounce over the past five months is about the same as the other two bounces”.
“But when in 2019 prices started recovering from the 2017-18 bust, they were helped by the Tailwind of three rate cuts”.
“And when prices started rising again in January 2009 after the GFC, there had been four rate cuts with two to come”.
“This time house prices started rising in February after eight rate hikes and kept rising against the wind of four more”.
“That’s absolutely unheard of”.
Absolutely Alan. Absolutely.
This is a puzzle. An enigma wrapped in a riddle.
I mean, when you look at borrowing capacity, that’s down about 30% on where it was in April 2022, when the RBA first started hiking rates, thanks to rising rates.
As shown in the next chart from Shane Oliver at AMP, borrowing capacity and home values generally track each other over time:
But there’s a disconnect right now.
That’s making some industry heads nervous. Yellow Brick Road chairman, Mark Bouris, for example, expects prices to take another leg-down, and fall another 5% by early 2024.
“I’m expecting more property to come into the market, particularly in spring, when many fixed mortgages are resetting to higher variable rates, and potentially drag prices lower”, Bouris said.
“We haven’t seen the full effect of the fixed rate reset, and I’m not talking about small percentages, it’s a huge portion of the market”.
“Around 40% of all new lending was fixed during late 2020 and early 2021, so these mortgages have started to reset in March and most will mature by the end of the year”.
“A lot of these borrowers will not be able to refinance, so some, not all, will have to sell, and this will likely occur during spring. This will exceed demand and likely push prices lower, although I’m not expecting a collapse in prices”, Bouris concluded.
Maybe. Maybe there’s a softer patch ahead.
But there’s still an epic shortage of housing, both for sale and rent, and immigration is running at record levels.
We also seem to have killed inflation without jacking up unemployment.
In that scenario, it is hard for me to see prices falling again.
But it’s hard to say. These are unusual times.
JG.