Where to for house prices? It could well be up
“House prices to crash” is an increasingly common clickbait narrative in the media, with the recent start of an interest-rate-hiking cycle getting the house-price pessimists crawling out from the rocks under which they hid during the recent boom.
There is also a lot of poorly informed emotion around the impact of interest rate hikes and the effect on ‘stressed’ and ‘stretched’ mortgage holders, none of which has much substance, with reference to facts and history.
Also by the Kouk:
It is actually quite rare for rate-hiking cycles to coincide with falling house prices.
Hold my beer!
Not counting the current interest rate cycle, there have been four instances in the past 30 years where the RBA has implemented an interest-rate-hiking cycle:
August 1994 to December 1994 - Cash rate up 275 basis points.
November 1999 to August 2000 - Cash rate up 250 basis points.
May 2002 to March 2008 - Cash rate up 300 basis points.
October 2009 to November 2010 - Cash rate up 175 basis points.
In each one of these four cycles, house prices were flat or higher - both one and two years after the first rate hike.
Five years after the first rate hike in each cycle, house prices were on average around 40 per cent higher.
As for the change in house prices after the last rate hike in the cycle, there was only one instance where house prices were lower two years after that last hike. That was a tiny 1.2 per cent decline two years after the November 2010 interest rate rise.
Looking at house prices five years after the last hike in the cycle, they were always higher, with the average gain around 30 per centIt is also noteworthy that house prices recovered after the flat patch in the wake of the 2009-2010 cycle, to be 26.1 per cent higher five years after the last hike in that cycle.
What happens to house prices after the first hike of a cycle?
The data on house prices in response to interest rate hikes demonstrates clearly and obviously that many issues are at play. It is not just interest rate changes.
It is also clear that rate hikes don’t last forever. Several of the hiking cycles have been supplemented by interest rate cuts less than a year after the last hike in the cycle.
Other factors including the level of unemployment, the pace of wage increases, new supply from construction, demand from demographic changes, including immigration, can and often do have a significant effect.
And when you stop for a moment and think about why the RBA would engage in a rate-hiking cycle, it is because – always – the economy is strong, unemployment is falling and wages growth is high.
These are powerful antidotes to the effect of interest rate rises when it comes to house price growth.
What happens to house prices after the last hike of the cycle?
Interest-rate-hiking cycles can be short and sharp – as in 1994 – or protracted - as in the period from 2002 to 2008. In all instances of a hiking cycle, there have been interest-rate-cutting cycles within five years of the last hike in the prior cycle, which may help to explain some of the longer-run house price strength.
It is important to look at how house prices changed after the last hike was delivered. The timing of this calculation clearly reflects the effect after the peak in the cash rate, which is when monetary policy will deliver its greatest negative potency on the housing market.
One year after the last rate hike in the cycle, house prices were lower in the last two cycles but were higher in the other two.
Two years after the last rate hike, house prices were fractionally down just once, and when taking into account prices five years after the last hike, they were strongly higher in all instances.
This is not to say interest rates have a perverse or no influence on house prices.
Clearly they do.
But what it does show is that factors in addition to interest rate changes impact house prices. In many respects these are obvious, as noted above.
Where to now for house prices?
No one buys a house as a short-term investment, especially if they live in it.
For owner-occupiers it is at least a 10- or even 15-year purchase plan, which means changes up or down in prices in the short term have little influence on sentiment towards what, for most, is their greatest asset.
The RBA started the current rate-hiking cycle just last month and, if the market pricing is correct, the RBA will deliver the largest hiking cycle in 30 years.
The cash rate will rise by a total of approximately 375 basis points, with the peak priced in for the middle of 2023.
Unrelated to the rate hikes in the past six weeks, there are signs house price growth is already cooling, maybe even registering small falls.
History suggests that as the cycle unfolds, house prices will be flat to slightly down over the next year or two.
A super strong labour market, rising wages and a dwelling shortage - as the international borders reopen for immigration - will offset higher interest rates, at least to some extent.
A weakish year or two for house prices would be no surprise after the fabulous increases in the 18 months to the March quarter, 2022.
But looking at what house prices may be doing in five years from now, my money is on prices being a good 20-30 per cent higher than they are today, even if they do dip a little in the next 12-24 months.
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