A major financial consequence of the pandemic has been the surge in top-end house prices across many developed countries, including Australia.
Source: The Economist
Indeed, Australia’s housing market continues to roar ahead, despite the fastest and most aggressive interest rate increases from the Reserve Bank of Australia (RBA) which saw official rates rise by 4% over the last year. The peak-to-trough change in Australian house prices was 9% according to CoreLogic, way less than many forecasters suggested who were looking for prices to drop by 15% or 20%.
Although housing is usually among the sectors most sensitive to interest rates, and as the US Federal Reserve (Fed) turned hawkish over the past two years and mortgage rates soared (from less than 3% to more than 7%), surprisingly, the jump in mortgage rates has not led to a decline in house prices in the US. They fell briefly as rates began to rise but have since rebounded to the record highs hit early last year after COVID-era stimulus washed across the economy. Figures released in late August in the US showed that this rebound may be gaining strength: house prices in the second quarter of the year rose at an annualised pace of 15%, according to the S&P Case-Shiller index, a benchmark for American property prices.
What explains this impressive resilience? There are still more buyers than sellers out there, is the easy answer. Although demand for homes has fallen as rates have risen, the supply of properties has also fallen.
The decline in transactions, all else being equal, ought to hurt the economy, dampening housing-related activity, with less money spent on remodelling, new construction, furniture and so on. This is not how things have played out, however. Unable to trade up to nicer houses, homeowners have invested more in fixing up their current homes. The rise of remote working has reinforced this trend, with people adding extra office space to their houses.
Many of those buying homes seem to be opting for newly built houses, rather than existing stock. Homebuilders have also been offering incentives to buyers.
Should the property market remain resilient, however, central banks might become concerned. A sustained rebound in prices would complicate the inflation outlook.
Nevertheless, it now appears that our property markets have bottomed, and we have moved into the recovery phase of the property cycle, and lower listing volumes (fewer properties for sale) are helping protect the market from further downward pressure.
While there are concerns about a “fixed rate cliff” ahead, and RBA data indicates most mortgage debt is on variable terms, many people have been overpaying on their mortgages during the low-interest rate cycle, while others have already refinanced.
Inflation has peaked and it is probable that so have interest rates; in due course consumer confidence will return and the markets will continue their upward trajectory. But with the housing supply so limited, and migrant numbers so high, we don’t expect the rental crisis to ease anytime soon rather we expect rents will continue to climb.
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