Based on interest rate cuts, the market is set for a boom. But interest rates aren’t the only game in town.
Economist and AFR columnist Chris Joye (who is one of the better economists out there for my money) reckons that house prices are going to jump 30% off their 2019 lows.
We’ve already seen the capital market average come back 8%, so he reckons you can pretty comfortably bake in another 20% in the near future.
And this is based on nothing but the past form of what normally happens when the RBA cuts rates:
“The housing boom is tracking more or less exactly as we expected. Based on the RBA’s model of housing dynamics, one should pencil in total capital gains of about 20 per cent this cycle assuming no further reductions in rates.
When house prices were still in free fall back in April 2019, we controversially forecast that the record 10 per cent bust would promptly end and be superseded by a sharp 10 per cent rebound.
This was based on the assumption of two immediate RBA cash rate cuts, which would push home values up 10 per cent in the next 12 months.
Martin Place duly delivered in June and July, and then poured more fuel on the flames with a third cut in October. And the central bank has implored borrowers to believe these rates will remain low for long.
According to a March 2019 paper published by two RBA economists, “a percentage point drop in the expected real mortgage rate would boost housing prices by 28 per cent in the long run”.
We have had 68 of the 75 basis points of cuts passed through to borrowers thus far, which implies home values need to jump by 20 per cent if these changes are perceived to be permanent.”
So what he’s saying here is that, unless the relationship between house prices and interest rates has changed – and there’s no reason to think that it has – then the RBAs rate cutting spree in 2019 should lead house prices to jump a further 20% in the short term.
But in many ways, this could be seen as a conservative estimate.
And the reason for that is that official rate cuts were not the only changes to the credit environment in 2019.
While the RBA was cutting rates, APRA (the bank regulator) was also removing the 30% limit on interest only lending, and generally giving banks less of a hard time.
APRA also changed serviceability assessment requirements. They removed the condition that borrowers must be able to make repayments of a floor of 7%, and replaced it with a 2.5% buffer on product rates.
With market rates currently sitting well below 4% right now, at December 2019, this means most borrowers would have been gifted with extra borrowing capacity.
So put that together with lower official interest rates, and you have a materially easier credit environment.
30% could end up being conservative.
DB.