Rethinking capitalism

Take a few and have a gander at my chart and table below.

Past and current house price cycle

Both displays show the past nine house price cycles across Australia.  The exhibits are timed around the market peaks.

The current cycle – shown in black and red on the chart and inside the light blue box in the table – peaked early last year with a median Australian house sales price of just under $1.1 million.

The median house sales price rose by 21% over the 15 months leading up to the early 2022 market peak – and I will go out on a limb here – and say that I believe the median Australian house sales price will decline by 15% from the $1.074 million peak – dropping to a median value somewhere around $915,000 in the second half of calendar 2023.

Housing values should start to rise in early 2024, and the median Australian house sales price could be close to $965,000 by June next year.  This is still down 10% on the previous market peak.

And it will probably take another year or so for median Australian house sales price to break the $1 million barrier again.

However, others are now stating a 20%; to even a 25%; fall from last year’s peak, i.e., a median house sales price of between $800,000 and $850,000 sometime this year.

If that happens, that will bring median house values back to where they were at the start of this current cycle, being in late 2020.

A similar recoil has not happened before in the other eight cycles illustrated in this post.

What actually happens depends a lot on inflation and interest rates.

Rethinking capitalism

Yet interest rates – this time around – are as much a result of the government manoeuvrers as they are RBA action.

There is little doubt that the current RBA head honcho is on the way out.  For mine the whole joint needs a broom through it and a completely new operation needs to be set up.

The RBA really should only need to meet four times a year and set monetary policy twice a year.  Yes, only two times per year.  Maybe even once.  If they cannot do that then we have appointed the wrong board.

I also think that inflation is here to stay, and inflation target rates need to be set about 1% higher.  So, the RBA target rate should be 3% to 4% not 2% to 3%.

The target cash rate should be between 2% and 3%, meaning that most Australia mortgages are set at 5% to 6% per annum.

The median annual variable mortgage rate over the nine housing cycles outlined above was 6.9%.

By the way, headline inflation somewhere between 3% and 4% isn’t a bad thing.  It has a lot of positives, one of which is helping the government build its coffers.

I do think the RBA, regardless of its future shape, personnel and current jaw boning are likely to only lift the cash rate once or at most twice more before they rest.

I wrote a few times last year that the RBA – nor any other federal bank for that matter – has continued to lift official rates during periods of substantial house price depreciation.

If the federal government really wants to help average Australians – and one really wonders given the federal government’s (regardless of flavour) Sydney-centric view of the world over the past 20-odd years – then they need to look in the mirror.

Tone down the green rhetoric and remove the impossible emission targets; walk back the recent round of union enterprise bargaining; and stop the current spending spree, superannuation grab and other fiscal stimuli.

Also stop incentivising the private sector and especially the likes of the building industry.  All that happens is distortion, which does more damage than good.

Think the FHOG, HomeBuilder Scheme, New Home Grants and even negative gearing plus capital gain concessions.

If you really want to slow down spending, then place the GST on all goods, services and transactions and increase it to say 15% for a set period of time.

Superannuation levies might be set lower and when you sell your home, the longer you live in it, the less you pay in taxation.

It works both ways of course, so when things get tough economically, the GST could fall below 10%, again for an interval.

And while we are at it, why not clean up the Australian tax system.

Here we should have a flat income tax rate of say 20%, across all individuals and private enterprises.  Everyone must pay, regardless of status or wealth.

Negative gearing should go too, over a five-year time period to help with the sticker shock.  When it was removed in the late 1980s, it didn’t lead to less housing investment, lower vacancy rates and higher rents.

A lack of investment lending in the mid-1980s was the real culprit, like it is now.

For mine, financial institutions should not be shackled when it comes to home lending.  If a bank wants to grow its investment lending business it should be able to, without having APRA place annual growth limits on such loans.

And when it comes to the housing market, stamp duties should not exceed say $5,000 per transaction; infrastructure levies should be set at 5% of the sales price and levied at settlement plus real estate agent’s fees should be curtailed to an Australia-wide award system, something like between $5,000 and $10,000 per sale as commission.  Maybe the real estate industry should be on a salary?

Afterall, in most cases these days the digital advertising portals do most of the work.

And whilst I am on a roll, let’s have one building code – with climatic zonal differences – across the country.

Major residential town planning decisions should also be judged by an independent panel of experts, headed always by an experienced builder.  That way we might get the housing that the market wants and can afford.

Now that’s what I call rethinking capitalism Jim.

My current mindset

Right now, the overall market conditions in 2023 looks set to be hard when it comes to the Australian housing market, with official interest rates rising to 3.35% in just nine months.

Yet, the second half of 2023 – to me – looks better than the first half of this year with interest rate rises over and confidence returning to the housing sector.

Leading indicators show that inflation is already stabilising, and when using labour force figures that you can trust, unemployment is rising and sharply.

In short, the recent interest rate rises are having an impact.

I expect the RBA to lift the cash rate to 3.6% – that’s one more 0.25% lift – sometime over the next couple of months and then rest.

Importantly the USA election in early 2024 is likely to have an impact on interest rates – and with all things being equal – the USA are likely to start lowering the target rate in late 2023.

The RBA has in the past followed the Fed when it comes to interest rate movement.

For now, I think that the cash rate is likely to be around 2.5% by the middle of 2024.  That’s a 1% drop from where they are likely to end rise by Easter this year.

And I wouldn’t be that surprised if the first drop – likely in November this year – is a 0.5% fall.

Of course, the usual Ts and Cs apply!


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