More Doomsday Reporting and the more likely outcome for Interest Rates

In a recent article by Chris Kohler from domain.com.au it is reported that:

  • 1/3 of Australians have little to no buffer in paying their mortgages.
  • Up to 90 per cent of mortgages are variable.
  • Despite this, 37.5 per cent of property sales are first home buyers meaning they bought at the tail end of the market, with extraordinary debt exposure.
  • Wages are stagnant with some indicators that Australians are working longer to earn the same income.

So according to this article we are now relying on wage growth to avoid seeing the long awaited debt bubble burst due to increased future interest rates.

Considering economic indicators this is highly unlikely. It would be more likely that government and banks will keep interest rates low using macro-prudential measures while keeping demand for housing high to continue now slow property market growth and encourage Australians to continue borrowing using capital. At this point in time, this seems to be the only economic solution for the government while we are waiting for a future economic growth miracle.

In fact, what many economists seem to miss is that there is a widening gap between the RBA cash rate and mortgage rates.

This will allow banks to lower rates rather than increase them as is predicted by Kohler and other economists. At this point, banks are simply preparing for the inevitable and giving themselves room to move while taking a profit now, while they can. Lowering mortgage interest rates is a move preferable for banks compared with increasing mortgage defaults.

So rather than looking toward an increasing mortgage rate, we will be looking for a decreasing rate if wage growth is not forth coming.

In other words, Australians are more likely to continue to see slow growth in the property market with slightly lower mortgage interest rates. As it is highly unlikely to see wage growth – get ready to work even harder and longer to pay your mortgages.

Careful Adjustment with the Chance of Crash (Unlikely)

Considering the Government’s recent Macro-Prudential regulation for the housing market and the potential of more to come we are now looking at the peek of the property market according to UBS and as indicated in the latest figures of ‘Consumer sentiment towards housing’.

If UBS are correct and the property market has, in fact, peaked then housing may become more affordable if household income can catch-up. Unfortunately, it is highly unlikely for this to be the cause in the foreseeable future as there is no real jobs growth.

In addition, UBS predicts property prices may stagnate but will not fall. Hence, unless there are other economic adjustments as, for example, rising interest rates property prices will remain high and housing unaffordable without a significant rise in household income.

Making further legislative changes such as to capital gains tax and negative gearing would hardly make a dent to housing affordability and simply drive rents up.

As it is highly unlikely the RBA will increase interest rates and trigger the long-feared debt bubble burst, property prices will (likely) remain high with potential growth …. be it at lower rates.

From Rising Interest Rates to Macro-Economic Control

Following on from our last post US Interest Rates Key to Oversupply in Property Market it now seems prudent to look at another economic regulator, macro prudentialism! This is because, as the Financial Review reports: “the Reserve Bank of Australia ‘is’ seemingly resistant to raising interest rates to control a possible housing bubble”.

This is despite the fact that ultra low interest rates continue to inflate the property market. An outcome our economy seems to rely on, with the reverse (a falling property market) too nerve-racking to contemplate. At the same time regulators are aware that the bubble cannot expand much further and a potential burst has to be controlled somehow. Therefore they seem to rely more, with the exception of the US, on macro prudetialism then putting the handbrake on the matter using interest rates.

Tighter Lending

Macroprudential regulation means, in this case, tighter lending. More specifically, it is getting more difficult to get a loan or a mortgage, which impacts on the property market in that less buyers are there to drive competition and the property market up. It also means that the dream of buying a house remains just that, a dream, for many average households and first-time buyers. Instead, it continues to drive the market to cashed-up investors or overseas buyers.

Greater Restrictions

As a solution, regulators are proposing greater restrictions on overseas buyers to limit property exposure and curtailing continuing sharp rises in popular property markets such as Melbourne and Sydney.

Macroprudentialism vs Interest Rates

Going back to the basics. The difference, in impact on the property market, is that macroprudential interventions propose to curtail the rising market, whereas, interest rate interventions would, most likely, cause the market to fall sharply. In short, we are opting to pull the band-aid off very very slowly rather than quickly. In real terms, interest rate rises would impact on those highly exposed to the market and benefit those who want to enter the market due to lower cost, whereas, macroprodentialism protect those currently in the market and hopes that labor market growth is maintained or sped up to meet future cost of housing.

Slow Growth vs Crash

The fact of the matter is that the bubble scenario ship has sailed. We have created a bubble! It is now a matter of what will happen in the future. Will we control the bubble with rising interest rates and thus adjust the market with a crash or will we be able to curtail growth and let sustainable growth catch up, as depicted in the chart bellow.

It seems our regulators have decided to attempt the latter. It’s a nervous game they now play. If the US decides to increase interest rates, because they can afford to as they’ve already had their crash, how many other’s will follow? And how long can Australia hold on to it’s low interest rates?

 

US Interest Rates Key to Oversupply in Property Market

US Bond yields have risen steeply, especially since Trump’s Presidency. Does this signal the end of low interest rates in Australia? And would this impact on our local property markets?

Roger Montgomery of The Australian comments that property prices are artificially driven by historically low interest rates. So the questions are: “How low can we go”? and “For how long”?

According to Montgomery – It’s time! It is now starting with particularly the Brisbane apartment market with another 5500 apartments completed and available since September 2016 and more to come (13300 by September this year). This is driving yield down. That is, the apartments are either empty or the rental return is lowering.

Lower return or yield and higher cost in interest means less investors are able to cover their mortgages comfortably and may look for more lucrative returns in other markets. Some will have no choice but to sell, especially if there is continued downward pressure on household income.

So the research questions are:

  • What are the current interest rates and do consumers’ feel they will rise, fall, or stay the same?
  • Would the interest rates influence consumers’ buying or selling decision?
  • Is there a current oversupply of properties or an under supply?
  • Does a perceived over- or under-supply effect the consumers’ buying or selling decision?
  • Are current property prices fair and will they rise, fall, or stay the same?
  • Do current property prices and forecasts impact on the consumers’ buying or selling decision?
  • Do consumers’ have a secure and high enough income to support their decision-making?
  • Are consumers’ household incomes likely to rise, fall or stay the same?