Suddenly, it’s all about policy.
The property market is on a very interesting knife’s edge.
And I think it all comes down to policy from here.
Let me tell you what I mean.
Right now, there are huge forces pushing house prices higher, and huge forces potentially weighing on the market.
On the plus side, is the fall in interest rates.
The RBA cut rates by 50bps to lean against the crisis. That’s not such huge news in and of itself. Lower interest rates always lead to higher prices, but 50bps isn’t a huge amount.
Remember we got 400bps during the GFC.
But that’s not all they did.
Because that 50bps only refers to the overnight cash rate. This is the price of money on the overnight money market.
But while they did that, they also crunched the cost of money ‘along the curve’.
The curve here is talking about time. So you borrow money for a night, for a week, for a year, for three years, etc.
Normally, they just crunch the overnight rate, and the rest of the curve adjusts automatically.
But they wanted more out of the curve, so they crunched it all the way out to three years.
That meant that the if you’re a major financial institution, you can normally borrow money overnight at 0.25%, and then for three years at something like 2.00%.
But when the RBA crunched the curve you got 0.25% overnight, and maybe something like 1.25% for 3-years.
That meant that the banks cost of funds, fixed for three years, fell substantially.
And this is why fixed rates have come down as far as they have. Check out the chart:
Normally the variable and fixed rates track each other pretty closely. But since March, there’s been a huge spread that’s opened up between the two. And that’s because the RBA is ‘crunching the curve’, and banks matched-lending rates have fallen substantially.
So far, that’s been worth about 200bps, with more ‘crunch’ possible in the months ahead.
Predictably, the market is rotating towards these lower, fixed rates. The share of the mortgage market on fixed rates has jumped.
Which means that interest rates in the market have fallen substantially, and that’s going to put massive upward pressure on house prices, as it did coming out of the GFC.
So that’s a factor that’s putting huge upward pressure on the market.
But it’s not a one way street.
Because there’s still a substantial share of the market on deferral, and the number of people unemployed or underemployed is very high.
If incomes fall, then that puts downward pressure on prices.
But so far, prices haven’t fallen because we’ve had policy bandaids for these problems. We’ve had mortgage deferrals and income support through JobKeeper and JobSeeker.
And so right now, to my mind, the entire market swings on these policy measures.
It is true that we’re looking to walk them back, but that hasn’t been messy yet, and given the slow-burn nature of the problem, I don’t imagine it’s going to get messy.
I’d be surprised if it’s not fairly orderly to be honest.
So when you put those two forces side by side, and realise that everything swings on policy for the moment, I really think you’re base case scenario is that prices have to be rising strongly over the medium term.
There’s a lot of uncertainty still in that picture, but the interest rate factor can’t be ignored.
The seeds of the next boom are already in the ground.