Regional revival?

It seems that everywhere you turn these days some talking head is prattling on about regional population growth.

This post aims to provide further clarity to this conversation.

I have included two tables and two charts to help explain why I think it is a load of poppycock and that the regions aren’t growing that much at all.

Let’s start at the top, shall we?

Table 1 shows that the capitals cities lost just over 44,500 residents to regional locations last year.  This is an increase from about 24,000 such movements the year before.

So, the press and regional spruikers cannot help themselves and shout something like “Regional population growth is booming!”.

Table 1 also shows net internal migration movements by whole state or territory.  Victoria seems to be on the nose and Queensland appears to have an increasing appeal but despite all the ruckus the recent internal migration changes (outside of Victoria) are really minor when it comes to total population growth.

Chart 1 shows net internal migration movements to regional Australia over the past decade.  Note the falling volumes between 2018 and 2020.

Table 2 breaks up the net regional internal migration numbers over the past three years by age group.  Most who move to (and/or stay in) a regional locale are middle aged or older.

Much has been made of the 14,300 millennials that appear to found regional Australia appealing over the last twelve months or so.  This volume has doubled during the pandemic yet makes up just 32% of the overall internal regional migration market.

Remember that migration is a net result.  It involves people arriving to and people departing from a particular location.

And when factoring in arrivals and departures, you find that whilst the number of incoming millennials has lifted by 5,000 to regional Oz over the last twelve months, the number of similar aged residents who didn’t leave their regional abodes rose by 10,000.

And here lies the problem with this whole debate.  Many who would normally leave a regional town – and in the main they are young folks – haven’t, mostly I believe because they really couldn’t, due to Covid-related restrictions.

Overseas locations and our capital cities offer much more in the way of job opportunities, wider social contact and to be honest more cultural experiences.

I believe that once travel restrictions are removed many millennials (and others) ‘stuck’ in regional location will again move to the big smoke or overseas.

This includes those wayfarers who tried a bit of the provincial life during the pandemic, but now that they have to return to the office, even if it is for only a handful of days per week, they are finding the commute too much.

Factor in $2+ per litre petrol prices plus the risk of a global recession and we might even see a stampede back to the metropolis.

For mine, chart 2, brings home the bacon and it shows falling regional departures versus somewhat limp increases in regional arrivals during the Covid period.  Subtract departures from arrivals get you a rising net internal regional result.

In fact, the pandemic’s impact has seen a decline in the number of internal regional arrivals when compared to pre-Covid trend.  Revisit chart 2.

And further muddying the water is that outer urban locations, like the Gold Coast, Sunshine Coast, Newcastle, Illawarra, and Geelong are included in the official regional migration figures.

One must ask if these conurbations area truly regional locations.

If there is a traffic jam each morning and afternoon on a location’s border, one must wonder if that place is really acting like a regional town or city.

And if the real coverage of how a major urban metropolitan area works these days is embraced, then I reckon that regional Australia, on the whole, would be at best stagnant when it comes to population numbers.

Regional revival?  I think not.

You have to do something of significance before you get a revival.

Building a stadium or hosting an event just doesn’t cut it.

Moreover, as a close mate of mine recently mused “You are always best going to somewhere, rather than leaving a place”.

And this post was written by someone who a few years ago did move to a true regional location.

And from my worm’s eye view of things, of the ten households that we know who moved from interstate and live around us, three have already returned to the previous state/city and two more are seriously considering it.

And we are all old coots!

Flood impact

The flooding rain across the eastern seaboard will have a big impact.

Economically, past major floods have seen big falls on the financial front.

It is expected that the current deluge could see between $1b and $1.5b wiped off the March GDP figures.  That is more than twice the impact Covid (to date) has had on the Australian economy!

Coupled with the Omicron impact plus the Ukrainian situation, I would be surprised if Australia doesn’t enter a recession (two quarters of negative GDP growth) over the first half of 2022.  Well, it might not get there officially, but it sure will feel like it.  Paying over $2 per litre for petrol is only the start of things to come.

Inflation will escalate, shortages will worsen, and somewhat ironically interest rates will rise too.  And we have to face a federal election on top of this misery.

Of course, the share market is being hit and so too will the housing market.

This post holds ten charts.  I couldn’t help myself.  And these charts look at the impact the 2011 Brisbane flood had on the local housing market.  Most of these charts are at the end of the post, as way of reference.  Chart 4 is our feature image this post and is located in the blurb.

Before we start it is also important to remember that the Brisbane housing market was in the downturn phase of property cycle when the January 2011 flood hit.  In early 2022 the Brisbane cycle is near the top of upswing.

The 2011 flood saw local sales volumes and prices fall, across the detached, attached dwelling and vacant land markets.  See charts 1, 2 and 3.

Many will be most interested in the impact on housing prices and chart 4 below shows that it took 33 months (or just under three years) for Brisbane house prices to recover to the same level they were in late December 2010.

Those suburbs not affected by rising flood waters took 21 months, on average, to regain pre-flood price points.  Whilst it took, again on average, 54 months (4.5 years) of the flooded suburbs to recover.

The 2011 also saw an increase in the properties for sale, as some decided to sell rather than stay put and rebuild.  In comparison listings are in decline today.  See chart 5.

Dwelling approvals fell for several years after the 2011 flood.  See chart 6.

As one might expect construction costs rose in both 2011 and 2012, but only mildly when compared to current escalations.  See chart 7.  Yet general inflation in Brisbane fell in the years after the 2011 flood.  Today CPI is surging.  See chart 8.

Chart 9 shows that there was an uplift in local job creation after the 2011 flood and Chart 10 displays that Brisbane’s annual population growth slowed substantially during fiscal 2011 and 2012.

To many the 2011 Brisbane flood was seen as a ‘stuff up’ especially when it came to the timing of the dam releases.  Not much might have changed once the 2022 deluge is dissected.  But this time around the flood impact was wider than 2011 and from what I can tell so far, the Wivenhoe Dam management had a much smaller detrimental impact on the extent and severity of the current inundation.

So, looking forward I think the following is likely.  

Brisbane’s housing market has now peaked.  It is likely to enter a mild downturn.  Sales volumes should start to fall.  Listings most likely increase.

Price points, in general across the Brisbane region, are now likely to stagnant and they are likely to remain flat for at least three but more likely five years.

There might be some price growth left in the ‘dry’ suburbs, but this will be mild and only short lived.  Think maybe 5% max and only to the next six to twelve months.

Price falls of over 10%, again in general, in flooded areas are probable.  It will take several years to prices in the flooded areas to regain their late 2021 values.

Dwelling approvals will tank too, especially apartments.  The flood will add further financial pain to many Australian home builders.  Building costs and CPI will surge and stay elevated for some time.  Years maybe.

Local population growth will also remain lacklustre, especially when compared to the historical average.

Yet if the past is any indication, then local job creation will get a further boost – revisit chart 9 – and investment opportunities especially in flooded areas, and particularly regarding properties with medium to long-term development potential, will present themselves.

One must also remember that the Brisbane and Bremer Rivers flood on a regular basis.

Since 1824, when records where first collected, both river catchments have flooded 38 times.  There is a chance of a flood every fifth year.  This means that there is 20% chance that each river could flood each year.

Of course, many of these floods are what the hydrologists label ‘moderate’ and ‘minor’ and hence often have little lasting impact.

Yet there have been 12 ‘major’ floods including the current downpour affecting the Brisbane River over the last 200-odd years and 24 ‘major’ floods in the Ipswich catchment.

So, there is 6% chance that the Brisbane River could have a major flood each year and this chance rises to 13% for the Bremer.

I don’t know about you but spending monies on the likes of the 2032 Olympics is like dashing around in a new sports car, whilst the mortgage and utility bills remain overdue.

The charts

Supply v demand #1 – Established housing market

Let’s start with some numbers.  These figures are for Australia and cover the 2021 calendar year.

Detached houses

Annual demand (sales):                   425,000

Supply (Listed for sale):                   158,000 (as of January 2022)

Supply in months:                            4.5

Annual price growth:                       25%

 

Attached dwellings (mostly apartments)

Annual demand (sales):                   220,000

Supply (Listed for sale):                   60,000 (as of January 2022)

Supply in months:                            3.3

Annual price growth:                       15%

 

Two charts are enclosed in this post too.

The first chart shows the supply and price growth trends for Australian detached houses and the second visual does the same for attached dwellings.

Some observations

As one might expect – as real estate at its core is all about supply and demand – there is a close relationship between the supply and demand interplay and price growth.

For both detached houses and attached dwellings the recent and rapid decline in supply is atypical and has been heavily influenced by Covid-related restrictions.  At the same time, demand was somewhat abnormally boosted by government largesse, record low interest rates and silly RBA overtures.

Supply is likely to increase and maybe rapidly this year as we finally learn to live with the virus (fingers crossed) and many homeowners sell in order to capitalise on higher price points.

Conversely demand is likely to fall due to falling confidence and higher interest rates.  

Price growth will slow down as a result, and we might even see prices fall if supply exceeds demand.

Finally, the attached dwelling market supply is now very tight – and is tighter than detached houses – so we are likely to see higher price growth for apartments and townhouses than detached houses over the short-term.

 

My statistical seven

Here are my seven rules for better understanding statistics.

  1. What is your emotional reaction?

How do you feel when you read about house prices, the rental market, housing affordability, new development, or the economy?

Many of us, if not most, accept or reject a statistical claim based on how we feel rather than on the actual facts.  Covid-related information is a perfect case in point.

So, my first rule – and often the hardest one to implement – is to notice your emotional reaction to a claim, rather than accepting or rejecting it because of how it makes you feel.

  1. What is the viewpoint?

Much of what we read about the property market (and also witness in a presentation, podcast, or video clip) is the ‘bird’s eye’ statistical perspective.

It is the big picture stuff, often summed up in one or two stats and covering a wide geographic area or product type.

I am guilty as charged when it comes to producing and sharing such information.

For example, according to Domain, the Brisbane housing market grew by 26% last year.

In contrast most of what we actually experience and hear from our friends, relatives and colleagues is a ‘worm’s eye’ view.  A ‘worm’s eye’ view comes from a personal experience.

Often the ‘bird’s eye’ and ‘worm’s eye’ view conflict.

“The Brisbane housing market is apparently booming, yet when my friend sold their home there last year, they really struggled to get their asking price.”

So, my second rule is that is often pays to combine the ‘bird’s eye’ statistical perspective with the ‘worm’s eye’ view.

  1. What is actually being said?

You should spend a few moments looking at the labels on a chart or the headings in a table and ask yourself if you understand what’s really being described.

Taking time to read the footnotes pays dividends too.

Many people over the years have told me that I said “x” when I said “y” and when I quiz them on why they think I said “x” more often than not that misunderstood the chart or table in one of my posts or during a presentation.

Now back to our Brisbane housing example.

What is meant by Brisbane?  Is it the Brisbane City Council area?  The Brisbane Statistical Division?  Or some other geographic area?

What is included in ‘housing’?  Detached houses only.  Attached dwellings too?  Only dwellings of a certain size or on land under a select square meterage?

What does last year actually mean?  Last 12 months to date?  Or a fiscal or calendar year time frame.

Is it a median or average price or some other measurement?

How old is the data and how big is the data set?  Is there a quorum to make such a statement like 26% price growth last year?

And has the data set been cleaned, removing agent’s advice or out of line sales, like family transfer’s or divorce settlements?

It pays to investigate such things and/or get your information from someone you can trust.  Hint, Hint!

  1. What is missing?

You should ask what is potentially missing from the data you’ve been shown, and whether your conclusions might differ if such exclusion/s were actually included.

Again, using our Brisbane price growth example.

Why pick just last year?  Best positive result?  What happens if we go back five years or better still ten?

What happens to the result if you break the region up into smaller areas?

Ditto when it comes to looking a resales only, especially without major renovations between sales.

  1. Who is saying it?

The cynic would place this rule at the top of the list and to be honest I often check out who is saying what before I invest too much time.

So, we all should look behind the statistics at where they came from.

We all have a bias, but some are more biased than others.

Also, for mine, experience counts.  Given my grey beard, bald head and increasing spread I trust an older head over a younger one.  But then again maybe I should revisit my first rule more often!

But then again older players in the statistical space sometimes have a reason to protect their past claims.  The same sometimes applies to official data sets as well.  Think the ABS and their labour force or CPI measurements.

I was told when I was a young lad – “Michael, forecast regularly but never let anyone see your track record”. Easier then, impossible now in the internet age.

Yet I have been known to delete the odd missive or two from my website!

But seriously folks in today’s post-truth world we seem to increasing want to maintain the narrative first and foremost regardless of the verifiable facts.

  1. Comparison and context.

We need to look for comparisons and context to help put any claim into perspective.

Let’s give the Brisbane housing example a rest of a comment and use some Covid-related intel to help illustrate this rule.

I keep reading about how deadly Covid is.  Yes, it has killed many, but it pays to understand the context.

Australia’s average death toll from all causes is about 160,000 per year.  That’s 440 deaths per day or just over 3,000 per week.

From the 1st of March 2020 to the 31st of January 2022, the average total deaths would be around 307,000.

The total number of Covid-related deaths in that period, whether “with” or “of” Covid, was 3,835 or 1.2% of all deaths.  

Sadly, and by way of comparison, in the 23 months to the 1st of February this year, Australia’s recorded number of suicides was 73% more than Covid deaths.  That’s 6,635 deaths.  Wow!

And it is also increasingly said that we best get used to hygiene practices like masking, deep cleaning, distancing, and isolation.  Yet the long-term normalisation of such practices reduces our exposure to microbes and thereby impedes the development of natural immunity.

Ironically vaccines may make the vaccinated more vulnerable to potential Covid virus variants.

Poppycock you say.

Well despite 76% and rising full vaccination since the 1st of November last year, more Australians have died “with’ or “of” Covid in the past three months than in the 20 months before.

Comparison and context matter.

  1. What is the time frame and relevance.

This is what I call “front page news” in my master class sessions.

When you are digesting information, I think is vital to ask if the data is really relevant and if so, then on what time frame does this relevance apply.

It is best maybe to think in terms of the ‘front page’ of the newspaper.  There are typically five or six stories on the front page, one of which leads with the biggest headline and usually the ink takes up about quarter of the front page space.  A second largish news account is next, followed by three or four smaller posts roughly of similar size.

So, what are the five or six things that really matter when understanding the topic in question?

Yet I think it is even more pertinent to view your ‘front page’ not through a daily prism but a longer time frame.  Weekly maybe, monthly hmmm, annually would be better.   But for many things a ten-year; generational or even lifetime horizon might provide more clarity.

In recent times any front page covering a weekly or even monthly time frame would feature Covid as either the lead or second story.

An annual and maybe even a ten-year front page would probably also hold a Covid column, but maybe not with a big headline.

A front page covering 20-odd years might also hold a Covid article but something small in the left hand corner.

And I do wonder if my lifetime front page (covering hopefully at least a 85 year time frame) would even hold the word Covid.

To close, let’s revisit our housing market growth example.

Any daily housing index is really just noise.  Ditto the monthly and even quarterly figures.  For mine, it is better to think on an annual basis and then best over a ten-year or longer time frame.

When it comes to the stuff that matters with regards to the housing market, may I suggest:

  • Market depth is important i.e., number of sales by price group and the underlying housing demand for housing it that area.
  • Supply, both new housing development and stock for sale, matter too and especially understanding the constraints (or otherwise) to that supply.
  • Timing also matters. Where is the market’s position in the property cycle and how has that marketplace behaved in the past?
  • What support is there? What is the relevant demographic, psychographic and economic trends?
  • Locational attributes. Is the locale unique and if so, why and will that distinctiveness mature?

And of course, I cover this material in the master class session too!

End note

So, these are my statistical rules of thumb or habits of mind that I’ve acquired, often the hard way, after nearly 30 years of doing this job.

Of course, who has time to apply these seven rules every time.  In fact, who can even remember them all.  I often can’t.

So maybe I could have saved you three or four minutes and me a couple of hours of my time and just written one rule, be curious.

I really do think we should all keep an open mind, asking on occasion if we might be mistaken or whether the verifiable facts have actually changed.

Oh, and remember most things you hear in the real estate space is either ‘recency and primacy’, in other words the most recent thing someone heard or was released and/or the tale that screamed the loudest.

Regrettably, many things released about the housing market don’t pass my seven rules or even a simple investigation by someone curious.

It’s the economy, stupid

So, who do you think will win the federal election?  ScoMo or Albo?

Why I am asked such things is a little beyond me.

My standard answer is that federal elections are won by individual seats, and you should be voting for your local candidate not the current head of the two major parties and for what is worth, on a seat-by-seat basis, it seems (as at mid-February) that the election result is too close to call.

Having now stated my proviso, for mine, federal election voting decisions are based on economics and not all the other stuff that Canberra or the press bubble babble on about.

Well, that has been the case, again in my opinion, since the early 2000s, when Australia (and much of the western world is seems) became an economy first rather than a community or society.  Money became the measure, not the other important stuff.

It’s the economy, stupid after all.

Sure, certain events, sledges or even legislation are often used as a wedge, but their use is more often than not to distract the electorate from poor economic news or trends.  As a case in point witness the timing of the Religious Discrimination Bill.

Our chart this week shows what I like to call the Pain Index.  It is the combination of Australia’s headline inflation rate and the countries ‘unemployed’.

Typically, since 2000, when the Pain Index is high or rising, we have seen a change in government.

The exception to this rule was in late 2007 when Labor won.  Whilst there was a lot of political noise at the time, in short, a major reason for the change was that John Howard overstayed his welcome.

Our chart suggests two things, one is that the Liberal’s hold on things economic appear to be on the slide.  This is especially the case as wage growth is unlikely to match rising inflation.

Paying over 200 cents per litre for petrol also doesn’t help and if you haven’t paid for your annual insurance premiums of late, you wait, it won’t be pretty.   And then of course there is greenflation.

And second, is that we might see an early election.  It might be best to have the poll before economic things side further.

Segueing into the housing market, for mine, 2022 is a year of two halves and the halfway point is likely to be determined by when the federal election is held.

Before the federal poll things should remain loose but after it is done and dusted (and regardless of the outcome) the screws should start to be tightened.  Up goes interest rates and most handouts are likely to stop.

PS. Interestingly – well to me anyhow – is that since the 2007 election the proportion of votes to the ‘other’ parties has been increasing – from 15% in 2007 to 25% in 2019.  This coincides with a rise in the Pain Index and also the general trend downwards in confidence (revisit last week’s post).

Grace and Brittany, and rightly so, have definitely thrown a spanner in the works this time around.  Me thinks the ‘other’ parties will get close to third of the vote this time around.  So it will pay to understand where your local candidate’s preferences go.

But regardless of whatever distractions are thrown up in coming months, it really is all about the economy, stupid!

PPS.  Annual insurance premiums are a good bellwether as to where general inflation is heading.

Sales

Many ask me for my short-term predictions about price growth.  We covered that last week.

Some ask me about sale volumes.  I think that is a more pertinent question.

One of the best short-term predictors of residential sales activity is consumer confidence.

When confidence is rising – i.e., more people are optimistic than pessimistic – then more people buy their first home, upgrade or downsize or purchase an investment property.

The opposite happens when confidence falls.

Our chart this week shows that the relationship between sale volumes and confidence is a tight one.

Housing investors, rather than owner residents, seem to be affected the most when it comes to changing sentiment.

And looking forward, falling confidence of late, means that sales volumes look like they will weaken across the country into the first half of this year.

House price outlook #4

Well, hello and happy new year!

I have covered this topic several times last year.

Our analysis is proving to be a reliable indicator of short-term house price growth.

We know that Australian house prices rose 25% during calendar 2021 and the just released official lending statistics suggest that house prices could now rise by 13% for the year ending March quarter 2022 and median house values appear set to rise by just 5.5% for fiscal 2022.

So, house price growth is expected to continue over the next six months with the pace of escalation slowing down noticeably as we approach winter.

Two charts are below and for those that aren’t into graphs – yes there are such people! – here is a simple summary:

Recent annual Australian house price growth:

December 2020        2.5%

March 2021               10%

June 2021                  19%

September 2021       22%

December 2021        25%

Matusik forecast annual Australian house price growth:

March 2022               13%

June 2022                  5.5%

If you want to see my past short-term house price outlook posts go here:

May 2021

August 2021

November 2021

Goodbye 2021

I don’t know about you, but I am stuffed.

So much so that last week was the first one in over a decade that I didn’t do a weekly post.

Heaps of consultancy work, with hard timelines didn’t stop the Missive or Snapshot (for those with a long memory) in the past.

However, the last two years have taken their toll, despite the positives at my end far outweighing the negatives.

It seems that many things are in a snowballing flux, with more rules and regulations these days than you can poke a stick at.

And for the life of me I cannot see 2022 being much different to 2021.  We are putting a lot of pressure on 2022 – just like we did to 2021 late last year – if you ask me.

So goodbye 2021 and fingers crossed that I am wrong about next year.

I wish you a Happy Christmas, a fun filled New Year’s Eve and a relaxing break.

I leave you this year with some new music that I really enjoyed this year, some fiction worth reading (I do like crime novels) and some funnies.

We reopen in late January.  See you then.

Inflation

So, will inflation raise its head and lead to higher-than-expected interest rates?

Five reasons for low inflation

Firstly, unionised labour is now a fraction of what it used to be.  Large collectively negotiated annual wage increases appear to be a thing of the past.  This is turn has led to lower inflation.

Second, the world has been investing heavily in technology and in particular, automation for the last decade.  The last two years has seen an acceleration of this trend.   Automation, robotics and ‘the algorithm’ displaces labour.  This in turn hammers another nail in the inflation growth coffin.

Thirdly, globalisation.  Low inflation of recent decades was influenced by global trade, with its emphasis on cheap production in low-cost locations, such as China, India and more recently Africa.  Open trade has also led to higher rates of immigration.

Four, immigration.  There is little doubt that a high level of immigration, especially when a large proportion of the migrant influx are looking for work, limits domestic wage growth.  Conversely, we witnessed recently that fewer overseas migrants to Australia resulted in higher wage growth.

Moreover, as we reach 90% vaccination coverage and our international borders reopen, the return of immigration will reduce labour competition and the current associated wage and salary pressures.

Five, Long Covid #1.  We see a repeat of 2021, being that we remain constrained due to new Covid mutations but this time there will be little government monies to bail us out.  Peeps will spend less.  Demand pull inflation will fade and maybe quickly.

So, we could surmise from my spiel so far that inflation is likely to remain mute.

And this is positive news because if inflation remains structurally lower, interest rates should also remain low.  Interest rates are set to rise but not as much as they would need to if inflation was operationally higher.

However, Australian CPI inflation rose 3% over the past twelve months and in the US, the corresponding measure has reached 6.2%, the highest in nearly 30 years and across the Eurozone prices are rising by is 4.9% per annum, the highest rate since the start of the Euro.

Is this just temporary, an anomaly or something more long term?  This is the $64 dollar question.

So, it would be remiss of me not to outline that there is also a case as to why higher inflation may return.

Five reasons for higher inflation

One, growing debt.  Much debt has been incurred to tackle the spread of Covid and help prevent economic collapse.  Government spending is also likely to keep running above tax revenues for the foreseeable future, resulting in even higher levels of debt.  Much of this debt will have to be repaid in raising taxes and this could flow through into prices.

In addition, restarting business operations as well as meeting post-Covid occupational health and safety requirements will require new expenditure.  Many businesses will try and rise prices to recover any pandemic losses and future higher operating costs.

Two, higher costs.  Australia faces higher transportation costs due to freight capacity constraints and a shortage of mariners from developing countries where vaccination rates lag.   At home, expansive government spending, record low rates and central bank largesse have driven up housing demand resulting in a shortage of building materials, trade labour and furniture etc.  Property prices have escalated as a result, feeding into an intensifying FOMO loop.

Three, rising geopolitical tensions.  Whilst globalisation helped reduce inflation, trade barriers and sanctions plus the ongoing Sino-American wrangling is retarding cross-border commerce, access to technologies and finance and is creating shortages of critical components, such as semiconductors and raw materials.

The rise of nationalism, enhanced by the Covid pandemic, could further exacerbate this trend.

Fourthly, the inflationary effects of climate change mania and especially the poorly thought-out energy transition – with underinvestment in traditional and economically sustainable new energy infrastructure – may result in persistent high energy prices. Carbon taxes, levies on carbon-intensive products and compliance with greenhouse gas reduction targets will also add to costs.

Fifthly, long Covid #2.  Covid-19, considered temporary at present, may become perpetual. The likelihood of substantial ongoing health costs and intermittent interruptions to activity have not yet disappeared.

Just how transient these factors are is not yet fully understood.  And that is why inflation is now a risk.

Inflation it is often said to be like a genie; once out of the bottle; it is difficult to put back in.

That is why I think central banks will act sooner than later and if they do so – and with everything crossed – they might just be able to get the genie back into the bottle.

Interest rates up but when and by how much?

Of course, interest rates are going to rise.

The banks are already lifting long term rates as the cost of money is rising and it is only a matter of time before one of the big four breaks ranks and lifts variable mortgage rates.

Of course, financial instructions like the cover offered by the RBA cash rate before they hike.

The RBA had been talking about no rate rises until 2024.  Now they are making noises about 2023 and expressing concerns about inflation.  We all know that APRA have just raised the home loan assessment buffer from 2.5% to 3.0%.

More APRA pain might be on the cards, but that depends on what the RBA does.

So, when will the RBA lift the cash rate and by how much this cycle?

The market is expecting the RBA to lift the official cash rate several times during the second half of calendar 2022.  Most economists say 2023.  I think these things are very political and the second half of 2022 – post the federal election – we will see the RBA tap the brakes, but most of the lifts will be during calendar 2023 and 2024.

And by how much?  Current model estimates of the neutral rate average around 3%.  That is a big lift from the current 0.10% RBA cash rate.  A lot depends on inflation and its longevity.

Covid has reset the baseline on spending and as we come out of Covid there should be a surge in inflation… the question is, will this be a sustained increase or is it a correction back to the norm?

Also, there is the question about wage growth.  Is the current lift sustainable?  Will a return of net overseas migration limit wage growth?  What about technology, robotics, digital stuff, and the internet of things?  Then there is geopolitics.

I will cover wages next week – but for now – there is a strong body of evidence that suggests that wage growth will remain weak over the medium to long term.  And as a result, a limited increase in official interest rates this cycle should be enough to adequately dampened inflation and lessen irrational exuberance.

For mine I don’t see the RBA overreacting and as a result I see the offical cash rate lifting between 1.75% and 2.0% by the end of 2024, with the first lift being just 0.15% – bringing the cash rate to 0.25% – sometime in late 2022.  After which I see 0.25% increases, and most likely on a quarterly basis, during calendar 2023 and 2024.

A few are now forecasting house price falls during 2023 as a result of rising interest rates, a lift in the number of dwellings for sale, affordability limits and even buyer fatigue.

The CBA is the most bearish (at this stage) with a forecast that dwelling values could fall by 10% in calendar 2023, after growing by 7% next year.  The CBA is keen to stress that this will simply see dwelling prices return to current levels.

The other three major Aussie banks (again at this stage) appear a bit more bullish, with average forecast dwelling value declines ranging between 4% and 8% during 2023 depending on who you ask.

I have included three charts this post that clearly show that rising interest rates do have a negative impact on values, sales, and housing construction.  And conversely falling interest rates have a positive impact.

So, what is my medium-term price forecast? 

Well, I don’t like to put a figure on it.  It is a bit like playing darts on a moving boat.  Ha, more like riding on a jet ski these days.

I do think we will see a plateau in home values over the next five plus years.  Some years values will fall, and during others they will rise, but overall, there won’t be much change until the next big thing drives values higher (or lower).

The trouble is that we have used up most of the ‘upside’ drivers such as falling interest rates, double income households, strong wage growth, low household debt, cheapish and more plentiful urban land, just to name a few.

Maybe generational wealth transfers, returning expats or more overseas buyers will have a positive impact in coming years?

To be honest looking forward the housing market looks like it will have to navigate headwinds rather than ride on the coattails of a tailwind, so maybe best not pay too much for your home, that investment property or development site.

But in the meantime, my short-term housing value model suggests there is some price growth left in the kitty.

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