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RBA proof that Australian 'housing boom' lemmings are wrong

A nearing cycle of interest rate cuts has fuelled speculation of a housing boom, but there's a bigger economic picture in housing price trends.

There is a growing groundswell of opinion that places an unhealthy weight on the importance of interest rates in driving house prices. The Reserve Bank of Australia (RBA) is getting close to embarking on the start of an interest rate-cutting cycle.

This has sparked a litany of articles, podcasts and other commentary speculating that there will be a house price boom when those interest rate cuts are delivered. Alas for those forecasters and their projections, they are more likely than not to be wrong.

Just as they were when forecasting hefty declines in house prices as the current interest rate hiking cycle was getting underway a couple of years ago.

RBA governor Michele Bullock and an inset of houses from above.
The RBA is under pressure to drop interest rates, but will that lead to a housing boom? I don't think so. (AAP/Getty)

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Let’s look at why they are likely to be wrong by examining more than three decades of interest rate decisions from the RBA.

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Since the early 1990s, there have been five interest rate hiking cycles from the RBA, including the current one which began in May 2022.

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In all interest rate hiking cycles, house prices have been higher 18 months after the first interest rate increase, in two cases by more than 10 per cent.

The chart from PinPoint Macro Analytics shows house price changes after the start of each of those five interest rate hiking cycles.

In all but the 2022 cycle house prices kept rising after interest rates were increased and in the case of the 2022 cycle, there were complicating factors such as COVID-related border closures which temporarily limited demand.

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RBA rate rise cycles
RBA rate rise cycles over the past three decades. (Stephen Koukoulas)

For many people, rising house prices when interest rates rise and vice versa is a conundrum.

Surely, they ask rhetorically, when interest rates rise borrowing power is reduced, the cash flow effect on mortgage holders is a deterrent to taking out a loan and buying a property. As a result, house prices must be weaker, right?

The error comes when the reasons for the interest rate hiking cycle are downplayed or overlooked.

Interest rate increases are always associated with strong economic conditions, rising inflation pressures, strong job creation, rising wages and full employment.

Coincidently, these are critical preconditions for optimism in the economy, including buying a dwelling.

The crux of Australia's house price outlook

A favourite saying of mine is:

“It is possible, if not relatively easy, to service even a large mortgage when you have a job and are getting decent pay rises. Conversely, it is difficult, if not impossible, to service a small mortgage if you are unemployed."

In other words, it is the health of the labour market – as well as supply and demand issues which I have covered extensively elsewhere – that dominate the momentum in house prices and these can dominate the effect of interest rate changes.

A rule of thumb worth having in the back of your mind when analysing house price trends is: interest rates go up when unemployment goes down and interest rates go down when unemployment goes up.

Related to that, house prices go up when unemployment falls and house prices fall when the unemployment rate goes up.

This is always at the crux of the house price outlook.

This brings us to current economic conditions and the outlook for the unemployment rate.

The RBA and Treasury are forecasting the unemployment rate to rise to around 4.5 per cent during 2025, which is around a full percentage point higher than the 3.4 per cent low in 2022.

This is probably enough of a rise to dampen housing demand to a point that sees house price growth stall and in some cities, edge lower.

If the unemployment rate spikes above these forecasts towards 5 per cent, or more, house prices could be skewed lower, even if the RBA embarks on a more aggressive interest rate-cutting cycle than is currently priced into the market.

In simple terms, it’s hard if not impossible to get a house loan, buy a dwelling or service a loan if you are unemployed. And this is regardless of the level of interest rates.