Why interest rate cuts have less influence than many think on the Australian housing market: Cashmore
Sunday, January 13, 2013/
Speculation has been rising in the housing industry since the RBA made its last 0.25-percentage-point cut to the cash rate, bringing the official figure to the post-GFC 2009 “emergency” level of 3%.
Now with rumours the banks may move outside of the central bank’s cycle and make ‘self-initiated’ rate cuts of their own, industry professionals are declaring a better year ahead for property prices than experienced over the previous two – and thus we start the crystal ball gazing.
However, as has been broadly noted, the standard variable mortgage rate remains some 0.6 to 0.8 percentage points above that of 2009, when it was sitting at 5.55% and prices were rising sharply. Additionally, the strong Aussie dollar is still affecting our terms of trade, and although unemployment data has improved of late (falling to 5.2% in November 2012 from 5.4% in October), Victoria’s results aren’t so positive.
In Victoria, a series of job cuts announced by building products maker Boral, which shed 90 positions in its plant near Geelong a number of weeks ago, and additionally from major companies such as Qantas, which announced the loss of 263 positions from its Avalon base late last year, increased Victoria’s jobless rate to 5.5% from a previous 5.4% – a figure that will go some way in restraining any potential house market gains in this region throughout 2013.
Additionally, Australia-wide economists are warning of ‘softer conditions’ for the rest of the year, which could potentially push the national unemployment rate to 5.7% by December 2013 with the most alarming reports showing “those aged 25 to 34 and 35 to 44” are the two biggest groups currently receiving Newstart payments – a point of serious concern.
Taking this into account, along with the consideration it’s an election year, which never inspires market gains, I suspect there’ll be little change to our current environment of ‘debt-adverse’ investor sentiment for much of the year – and along with that, little change in house prices.
In fact, regardless of the constant spruik on the effect of low interest rates on house market prices that is broadly assumed by many armchair commentators within the property industry, a look at the long-term data shows the connection is in fact pretty weak – a point that has been noted in several academic papers and can be clearly assessed from previous boom and bust cycles (something I may delve into further in a future column).
In other words, you would be hard pushed to find any long-term historical correlation between growth in ‘nominal’ house prices and the change in interest rates – and as for ‘real’ house prices (which accounts for inflation) movements tend to be in the ‘same’ direction rather than the opposing direction as some would expect – meaning as rates, rise so do prices.
Although it may seem logical to assume lending rates initiate price changes, other economic factors play a far greater influence, and unless the needed ingredients are combined, interest rates on their own can do little to change the housing market terrain by any significant degree.
When interest rates are low and more significantly falling, it stands to reason, expected growth in the economy is waning, which doesn’t inspire anyone to take a punt on growth assets considering the low inflationary environment.
Conversely, interest rates rise in response to a ‘flourishing’ economy during which a period of wage growth and healthy employment data underpins investor confidence (hence why periods of rate rises often accompany housing price rises.)
In such an atmosphere, it’s often the panic invested ‘rush to buy’ before prices escalate out of reach, that fuels a boom cycle outside of any change to the cash rate – thereby providing the bullish atmosphere many buyers unfortunately require in order make their move.
As a typical reaction, it takes a series of sharp upward movements in the cash rate in an attempt to defuse the bubble before it overheats – (as was witnessed in 2009-10) – and even then, prices typically plateau for a period before other factors come into play and a notable ‘correction’ is observed.
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