RBA’s balanced approach could be housing market saviour: PropTrack
The housing market could avoid deep price falls if the Reserve Bank takes a balanced approach to interest rate rises as it strives to keep the economy firing in the wake of the pandemic.
That is the view emerging from REA Group’s data business, PropTrack, which has this month launched a new index tracking monthly changes in residential property prices.
The call came as the debate about home prices flares as a federal election in which affordability is again expected to be a key battle ground looms.
The Reserve Bank on Friday warned that rising inflation and higher interest rates will make it difficult for some borrowers to meet their loan repayments, as highly indebted households brace themselves for a series of rate hikes expected after next month’s election.
In its semi-annual Financial Stability Review, the central bank said that while systems are resilient, Russia’s invasion of Ukraine and rising global inflationary pressures would cause more market volatility and uncertainty.
“Falls in financial asset and property prices could be triggered by larger-than-expected increases in interest rates, rising risk aversion, dislocation in financial markets and/or weak income growth,” the review said.
“Many financial asset prices remain at high levels, notwithstanding some recent declines. The prices of most types of commercial and residential property are also elevated”.
The bank noted loan arrears rates were low and had declined a little recently, with many households building up substantial buffers on their mortgages.
“Even so, housing credit growth has for some time exceeded growth in incomes, with the ratio of housing credit to income edging up from an already high level,” the bank said.
Economists at major banks have brought forward calls on official interest rates, with consensus now the RBA will lift its cash rate as soon as practicable after next month’s election.
PropTrack has a relatively upbeat take on the market with expectations that prices could be flat around the country, rather than falling as many bank economists have suggested, on the basis that the central bank will take a measured approach to avoid economic pitfalls like higher unemployment. PropTrack economist Paul Ryan said there were entry barriers for first home buyers getting into the market but questions if affordability is at crisis levels.
“So I think where the current narrative is wrong is that high housing prices does not equate to difficult affordability,” Ryan said. While prices are high he rejects the idea of a crisis.
“I think that’s overblown,” he said, noting the most first-home buyers got into the market last year since 2009.
“These are not conditions that are consistent with a housing market crisis,” he said. The key, he argues, are low interest rates, which have kept repayments down.
“Prices are not necessarily the issue; access to the market is in the issue,” Ryan said. He said the Morrison government’s homebuyer schemes are ”really well targeted” and have alleviated the deposit burden.
But the market has caught up to the decreased borrowing costs.
“Now we’re at this point where the process has gone into reverse,” he said, amid expectations of higher interest rates.
“Market expectations are incredibly steep,” Ryan said. But he is not convinced that interest rates will rise so quickly, tipping the central bank will await an extended run of strong economic conditions. It may also be conscious of the borrowings which Australians are carrying on property.
“Our view is that the RBA will take a slower approach than the market is expecting. Because there’s so many people that have taken up really large mortgages, there’s also so many people that have never experienced mortgage rate increases that currently have loans,” Ryan said.
He expects a balanced approach from the Reserve Bank. “They don‘t want to lean on the economy so heavily that there’s a big increase in unemployment, or a big drop in housing prices, ” Ryan said.
“That’s consistent with more of a flat market, although we may see some housing price falls, depending on how quickly the RBA increases interest rates,” he said. But global uncertainty could temper any rises.
Others expect more widespread drops.
NAB Group chief economist Alan Oster last week told a briefing by property service PEXA that house prices had started to stabilise in Sydney and Melbourne, but he said they were still strong in Adelaide and Brisbane. The NAB expects that after increasing by around 23 per cent house prices will be relatively flat in 2022, potentially falling in the second half of the year. “We expect to see falls everywhere in the second half of the year,” Oster said.
Looking ahead, it could get steeper with NAB calling a fall of around 10 per cent during 2023 on the back of rate rises and falling affordability.
Morgan Stanley‘s equity team last week confirmed that housing market momentum slowed at the start of 2022, after prices increased 21 per cent nationally last year.
The investment bank said that March data suggests this continues to play out as auction clearance rates had fallen below 70 per cent and housing finance data for February showed the value of loan approvals falling 4 per cent. “Sentiment has also softened, particularly amongst owner occupiers while the share of investor activity continues to climb,” Morgan Stanley said.
The bank’s proprietary housing indicator has turned “noticeably lower”. “This, alongside our expectation that serviceability and credit supply will both weaken as interest rates are hiked this year, means a softer outlook for housing, and we expect house prices to incrementally decline through 2022, and be 5 per cent lower by the end of the year,” Morgan Stanley said.