Australia’s housing market faces its biggest test in 30 years

PHOTO: Australia – The Lucky Country. NAB

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One of the world’s most expensive property markets faces its biggest test in more than 30 years.

Australia’s A$10 trillion ($7 trillion) residential real estate sector will this year have to absorb the sharpest interest-rate increases since 1989, if bond markets are right. The Reserve Bank last week began its first tightening cycle in 11-1/2 years, shaking the confidence of consumers with some of the world’s highest debt loads.

Dangerously High

Australia’s household debt is amongst the highest in the world

Source: Trading Economics

Data as at Sept 2021

After surging on the back of pandemic stimulus over the past couple of years, economists expect home prices to fall and building to slow as borrowing costs rise. That turnaround was on display at a weekend auction in the inner Sydney suburb of Darlington, where a two-bedroom home of 104 square meters yielded no bidders.

“A property like that would typically get snapped up within 3-4 weeks and the auction would typically have 5-plus registered bidders,” said auctioneer Alex Pattaro at real estate firm Ray White. “But the market is cooling, and as more stock comes into the market place it will have a bigger hit on the price.”

A declining housing market will be a challenge for the winner of a May 21 election as so much of Australians’ wealth is tied up in property. The result is likely to be weaker household sentiment and consumption, compounding the effects of higher mortgage repayments.

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Australian housing has been surging for much of the past decade, reflecting the RBA slashing rates from 4.75% in November 2010 to 0.1% during the depths of the pandemic in November 2020. Property prices jumped more than 20% last year.

The protracted easing cycle means an estimated 1.2 million home borrowers hadn’t experienced a hike before the central bank’s bigger-than-expected 25 basis-point increase last Tuesday.

Property consultancy CoreLogic Inc. estimated just before this month’s rate rise that a 200 basis-point increase in variable loan mortgage costs would see monthly repayments climb by A$1,005. The nation’s four major banks all raised variable rates by the same 25 basis points.

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Money markets are wagering the RBA will boost borrowing costs every month through December to bring the cash rate to about 3% by year’s end from 0.35% now.

“Based on market pricing, Sydney and Melbourne could fall by 20%,” said Diana Mousina, a senior economist at AMP Capital Markets Ltd. “There is potential for steep falls in these markets because the run-up in prices was larger and households in these two cities are also a lot more under leverage.”

But Mousina, like most economists, says the central bank can’t afford to be that aggressive. The last time rate hikes of that speed and magnitude occurred it almost triggered a collapse in the financial system.

Goldman Sachs Group Inc. is the most aggressive forecaster, predicting the RBA will lift the cash rate to 2.6% by year’s end, with half-point hikes in June and July. The median estimate is a cash rate of 1.5% in December.

“We expect the RBA hiking cycle to get stopped out earlier than most, and far below market pricing, as we think the latter would likely crash the housing market and cause a recession,” said George Tharenou, chief economist for Australia at UBS AG.