Why the property market is wet gunpowder, with no match yet in sight
4 Nov 2021
6 month(s) ago
Inflation and higher interest rates may be emerging as a risk to the property market, but there are big buffers.
There really is no more important issue for investors, in Australia and elsewhere, than the future of inflation. It is low in Australia at the moment, but as UBS notes, there is a lot of uncertainty:
“It’s difficult to assess the true inflation impulse. While new housing and automotive fuel added >0.5%, they will lift again in the fourth quarter. The end of lockdown will ease extreme supply side constraints, but global pressures seem more persistent, and domestic demand will rebound sharply as households (and businesses) draw down on deposits built-up since COVID (~14% of GDP).”
Yes, one of the perverse outcomes of COVID lockdowns has been a sharp rise in people’s savings. UBS says there are signs that inflation is rising faster than the Reserve Bank expected.
UBS says it expects quantitative easing (QE) to come to a hard stop next year, which will potentially put pressure on interest rates (if the central bank doesn’t buy government bonds then they have to be sold in the market and to make them more attractive it may be necessary to raise the interest rate).
“Assuming no material change by the RBA in November, we still look for slow hikes in the cash rate to 0.5% in 1H-23. “
REA Group director of economic research, Cameron Kusher is expecting higher rates:
“The RBA seemingly abandoned its 3-year Government bond target, which saw bonds shift much higher than their 0.1% target. The repercussions of this for housing is that interest rates, particularly new fixed rates, may see further increases over the coming weeks and months.
“We’ve already started seeing a lot of small rate tweaks on home loan interest rates, mainly on long-term fixed rate home loan products and some discounting on variable rate home loans, but today’s announcement suggests that more significant changes are on the horizon.”
The property market is pretty much a powder keg but so far there is no match. Rates are staying for the most part low. The NAB’s Alan Oster writes:
“Importantly for the housing sector, policy makers are alert to a build-up of macroprudential risks amidst very low interest rates and the sharp rise in house prices. In early October the interest rate serviceability buffer was widened by 0.5% to 3.0% above the loan’s interest rate. The impact of this will be to reduce the debt capacity of the typical borrower by 5% and the assessment for now is that this will not see a large impact on lending or the property market.
However, macroprudential policies are rarely used in isolation and we remain alert to the possibility of further measures around the turn of the year.”
Oster says surveys are showing the average expectation for house price growth over the next year to be basically unchanged.
“On average, survey respondents expect national house prices to rise by a still solid 4.3% over the next 12 months (previously 4.2%), but at a slightly faster 3.8% in 2 years’ time (previously 3.5%).”
The game of musical chairs continues. But there is a buffer, according to Michelle Norman and Norman Derham, writing in FirstLinks. A lot of that gunpowder is wet, it seems:
“We can’t see existential risk for the Australian financial system arising from less than 1% of the households having marginally increased their risk appetite and maybe borrowed too much. If you look at the number of over 80% loans over the past two years, it is 360,000, or just over 3%. Therefore, 97% of Australian mortgage lending is in bulletproof territory.
“To put our argument in simple terms: except for the group that have bought over the last few years, everyone else has a loan based on the price when they bought it (say, seven years ago) and rates have halved since then, and there has been income growth.
The parameters are these:
- Only 35% of Australian households have mortgages.
- Only 3% of homes trade per year. The average Australian stays in the one home for over 20 years. We’ve assumed that moving house is the prime driver for increasing or decreasing a mortgage. We also assume that any home equity redraw is offset by others overpaying their mortgage. Clearly younger people move homes and increase mortgages more quickly but you can assume an average seven-year turnover and still come up with unscary numbers.
- Interest rates have fallen materially over the past decade.
- Wages/household income has increased over the past decade.”
Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.