MNI INSIGHT: RBA Watches Calmly As Red-Hot Housing Cools

The Reserve Bank of Australia remains confident that longer-term demand for homes in major cities and supply constraints will support a rapidly-cooling housing market, which is a key driver of spending according to RBA models and whose total value has now fallen below AUD10 trillion, MNI understands.

While Governor Philip Lowe noted the interplay between higher mortgage rates, falling house prices and consumption as a source of “uncertainty” last week, the Bank takes comfort from low levels of negative equity, solid household savings and mortgage prepayments (See MNI STATE OF PLAY: RBA To Keep Hiking In Inflation Battle).

Nonetheless, this cycle has already seen a cumulative 225bps of rate hikes – with more to come -- and officials are keeping a close eye on how housing, and spending, hold up.

A 10% fall in house prices would lead to a 1.2% drop in GDP from its baseline level after three years, according to research from 2019. The RBA’s April Financial Stability Review highlighted modelling showing a 200bps increase in the official rate from the then level of 0.1% would lower real housing prices by around 15% over two years.

Private sector forecasts for a peak-to-trough decline of at least 15% in national home prices were bolstered by Tuesday’s release of data showing a AUD162.4 billion fall in dwelling values to AUD9.98 trillion in the June quarter, the first drop since June 2020. The mean dwelling price fell AUD18,900 to AUD921,500.

The last down cycle produced a fall in total value of dwellings of more than 4% between Mar 2018 and Mar 2019.

BIG COUNTRY, FEW CITIES

But the Bank views longer-term gains in house prices as being driven by the fact that a large proportion of Australia’s population is crowded into a couple of big cities, with the biggest of those - Sydney - bounded on four sides by geography. Social and employment changes triggered by the Covid pandemic may also have fed demand as buyers look for more space or abandon living with housemates.

Additional temporary constraints on the supply of new housing come from extremely wet weather on Australia’s east coast, building material shortages, and Covid-related absenteeism on work sites, which have affected the ability of builders to catch-up and complete work that has already been approved.

The limited threat of negative equity has been underscored by research from former RBA economist Paul Ryan.

Now a senior economist at REA Group’s PropTrack after nearly a decade at the Bank, Ryan calculates the proportion of recent sales that have resulted in a capital loss – roughly 6% - is a little less than one-third the rate seen in the two years prior to the pandemic.

He notes properties held for six to eight years are over-represented in recent sales. Many homeowners who have sold have cashed in handsomely.

PropTrack calculates prices are down 2.7% below their March peak after rising 22% in 2021.

More insight into the RBA’s thinking on the housing market will come when Jonathan Kearns, the Bank’s head of domestic markets, speaks at a property summit in Sydney on Sept 19.

Deputy Governor Michele Bullock said in July that most borrowers are well positioned for higher rates given liquidity buffers and substantial equity in their homes. The RBA is currently seen as more likely to hike by 25bps at its next meeting on Oct 4.