Why aren’t prices rising more quickly? This is why
It’s an interesting phase in the market right now. It’s caught in two powerful cross winds.
The first is the downdraft emanating from rising interest rates and the fixed rate reset.
True, the RBA has paused hiking interest rates. But interest rates work with a lag.
So interest rate hikes are still working their way through the system.
To make the point, CBA economist, Stephen Wu, released data last week showing that the amount of interest charged on CBA bank accounts rose further in July, despite the Reserve Bank of Australia (RBA) last increasing the cash rate in June.
So why are interest expenses rising if rates are not.
Partly that’s due to the proportion of the market on fixed rates, which are now steadily rolling over to much higher mortgage rates.
But its also just how it works. A separate report from CBA senior economist, Belinda Allen, noted that “generally, there is a three month lag between RBA rate rises and higher mortgage repayments, as well as between switching from a fixed rate loan to variable rate loan”.
So were not out of the rate hike woods just yet, Goldi.
And by the end of the year, CBA still only reckon that just 85% of the RBA’s rate hikes will have landed with borrowers.
And then by the middle of next year, Australian households will be paying their highest share of their income on debt repayments on record:
That’s a serious headwind for property prices.
And yet… property prices are still rising.
Just an old-fashioned epic housing shortage.
Labor announced a “plan” (=hand-wavvy intention) a few weeks ago to build 1.2m homes over the next five years – which is what will be needed to house the population which is growing strongly.
Only problem is, nobody believes it can happen. It equates to 240,000 homes a year. We’ve only built that many homes in a year once, ever. And now were supposed to keep that pace up for five years straight?
As developers left right and centre are going bust?
There’s no chance.
The SMH reckons that in Sydney they’re going to come up at least 134,000 dwellings short. But even that seems a bit optimistic. The shortfall will probably be bigger.
Building housing is like picking fruit, in the sense that all the low hanging fruit is gone, and it only gets harder from here.
So these are the two factors driving property prices right now.
But this is the interesting thing.
The impact of rate hikes? That’s temporary, and will have largely washed through by the middle of next year.
But the housing shortage? That’s a forever thing, and will be with us for the next five years… at least!
So, the big question then: what happens when the downdraft is finished and the only thing left is the updraft?
Yep. Don’t need a weatherman to figure that one out.