Why the reinflating house price bubble might run out of puff

Australia’s housing market is perched on a wire, where a delicate balance exists between competing forces. And house prices, while increasing, are not rising as convincingly as they were even a few months ago.

Realistically, it is precarious, and house prices could go either way before the year is out. There is already evidence that the rush of blood pushing prices higher is petering out.

How much puff does the property market have?
How much puff does the property market have?Credit: Nikki Short

Tuesday’s Reserve Bank decision to keep rates on hold in August may give house prices some additional price momentum, but pressure will remain on borrowers.

Economists who until earlier this year were predicting house price falls of up to 15 per cent in 2023 were forced into an uncomfortable about-face on their forecasts.

Most still forecast prices will rise this year, but they are far more equivocal about the clouded crystal ball.

Capital Economics to date has been an outlier – it was one of a handful that had remained firm in its view that Australian house prices were set for another leg down. But on Tuesday, it confessed to being less confident about that prediction.

The lack of housing stock has emerged as a strong countervailing wind. At this point, the pressure from a supply shortage in housing has outdone pressure from rate rises.

This is a property market prone to make failures of forecasters.

The 12 rapid-fire interest rate rises over 14 months, rising mortgage stress, and $95 billion of cheap fixed loans about to roll over to expensive variable loans within months, should be putting significant downward pressure on house prices.


It did for nine months until February when house prices started climbing again.

Prices rose in the face of evidence of more properties coming onto the market, particularly investment properties – a direct result of owners being unable or unwilling to service higher interest rates.

But the lack of housing stock has emerged as a strong countervailing wind. At this point, the pressure from a supply shortage in housing has outdone pressure from rate rises.

Immigration and the return of students post-COVID are the immediate culprits that contributed to the outstanding demand for our limited housing stock. A bunch of government decisions, at federal, state and local levels over many years, have hindered the building of new housing, and while they are all now in feverish debate over remedies, it remains a talking point and years away from being addressed.

Then there are the often under-discussed pockets of the community who have cash, not feeling too badly affected by the increased cost of living, and are still in the market to buy property. They remain on the sidelines ready to soak up the houses stressed borrowers are selling.

The Reserve Bank referred to the divide between the “haves” and “have-nots” in its decision on Tuesday saying: “Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.”

The Reserve Bank highlighted the divide between the “haves” and  “have-nots”.
The Reserve Bank highlighted the divide between the “haves” and  “have-nots”.Credit: Peter Rae

Even those with mortgages appear to be feeling a little more confident based on the ANZ-Roy Morgan consumer sentiment readings over the past week. This demonstrates mortgagors believe we are at, or close to, the top of the interest rates cycle.

Tuesday’s Reserve Bank decision should justify consumers’ improved mood.

And behind the economics of the market has always been a strong social pull in Australia towards the dream of homeownership.

The Reserve Bank keeps an anxious eye on the property market – factoring in any signs of reflation into its interest rate decisions.

But central banks attacking frothy housing markets by raising rates is a short-term solution that perversely creates longer-term problems as investors are less likely to build new housing when interest rates are high. The Reserve Bank noted in Tuesday’s decision that growth in dwelling investment was weak and rent inflation was elevated.

There are only two ways to solve this rental crisis – increase the amount of housing stock or increase the number of occupants living in a property. (The crisis intensified post-COVID when, mostly younger, people moved back out from the family home).

Most Viewed in Business

Source: Thanks smh.com