Could some ominous rumblings from central banks signal the beginning of the end for the global and local property boom?
It certainly looks that way after the US Federal Reserve and Australia’s Reserve Bank conceded that their original timetable for interest rate rises might have to change to fight growing inflation and cool down a red-hot jobs market.
You can argue about the semantics of their public statements but there is little doubt that the previous scenario of ultra-low rates sailing all of the way through to 2024 now looks highly unlikely.
For the US Fed, the moment of reckoning were inflation figures which blew straight past their “worst case” predictions.
Can inflation rises really be a one-off?
There has been plenty of rationalisation about the “one-off” nature of the inflation boost but with monetary conditions set on ultra-easy, not even the US Fed can take the risk of inflation getting out of control.
That is why it went hawkish and warned of interest rate rises sooner than planned to head off inflation and economic overheating.
Here in Australia, it was the jobless rate falling a full 0.4% to 5.2% in May that proved to be a wake-up call as to what was happening in the real economy.
Australian jobs numbers flying
With total employment up 115,200 in just one month – most of them full-time jobs – it is hard to argue that the jobs market still needs unprecedented support due to the pandemic.
Even the lack of wages growth makes it difficult to hold the ultra-low interest rate argument forever, with ANZ (ASX: ANZ) one of many that have now pencilled in the RBA lifting the cash rate twice in the second half of 2023 to 0.5% – with a bias towards that happening even earlier.
The real question is, would some early shock interest rate rises be enough to hold back the most enduring boom of them all, the runaway property prices that have been a feature not just in Australia but in many parts of the world?
Does the housing market need the Phar Lap treatment?
It is one of those questions that is hard to answer in advance but it is reminiscent of the official efforts to hobble the people’s hero, race horse Phar Lap.
No matter how good the horse, if you add enough lead in the saddlebags, eventually it will come back to the field.
With Melbourne’s median house price now $908,000 and Sydney’s $1.2 million, the numbers are becoming hard to justify on any rational grounds, particularly in relation to stagnant income levels.
The real question is how much lead will be required to stabilise price rises, which is again something that central banks usually only work out by checking the rear vision mirror for debris.
Research shows a flying housing market is a big problem
While politicians and even central bankers are quick to say rocketing property prices are not their problem, some excellent research by the University of New South Wales showed that our house prices are making the national economy less stable and lowering productivity.
In finding that home ownership is now virtually out of reach for anyone under the age of 35, the research found that the boom was diverting money away from more productive investments, distorting the lending policies of the major banks and promoting economic instability due to high debt levels.
“A system that raises housing costs for all Australians, that raises instability and lowers productivity does not serve the nation well,” the research found, adding that the rising housing wealth “is not like the wealth created from effort and innovation, for that creates gains for all.’’
“Rather, it makes some Australians, the affluent and older, better off by making younger and poorer Australians, and also future buyers, worse off.”
Housing prices have outstripped income growth since the 1990s
The research found that house prices have outstripped income growth since the mid-1990s, contributing to a 4% drop in national home ownership.
That fall in ownership was particularly concentrated on the young, with home ownership levels among the under-35s having halved since 1995.
It also found that a slew of “housing affordability’’ stimulus measures by governments state and federal had done little to address the complex problem and that nothing short of a Royal Commission was needed to get a more co-ordinated response.
Is another Royal Commission the answer?
They also recommended an end to stimulus measures, a concentration on social rental housing and for the RBA to have the provision of a stable and well-functioning housing market added to its responsibilities.
While most, if not all, of these reforms will never see the light of day, some earlier than expected lead in the saddlebags in the form of higher interest rates are much more likely to cause a pause in the housing market than anything else – particularly given most of the boom period happened during a period of steadily falling interest rates.
Of course, interest rates are a very blunt instrument and rising rates will cause all sorts of other problems if they are applied too early or too hard.
Rising debts will make interest rate rises painful
Given the still rising rate of household indebtedness, growing rates will be a painful but perhaps necessary pill for many to swallow and should slow further price increases.
A measure of that difficulty is provided by the Australian Bureau of Statistics which showed the average new loan had jumped $35,000 in a year to reach a record $635,300 in NSW in April and the average Victorian loan also jumped $35,000 in the year to April to reach $523,000.
Not even these massive debts were enough to produce price rises that were “world beating”, with an OECD report into the global housing market showing that Australian house prices were the fourth largest after inflation, behind New Zealand, Canada and Sweden.
That report found that house prices across much of the developed world had grown so fast and by so much that they were eating into ability of households to pay for other essentials such as health and education.
It also found a lack of supply and restrictive land use laws had played a part in the Australian price boom.