Just in case you were ever worried that the Australian housing market might crumble, the latest ABS housing loan figures show that in November the value of new housing finance was 13% above that of a year earlier.
And because of the strong link between growth loans and house prices, this suggests that house prices should continue to rise very solidly through the next six months:
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It’s quite amazing how nothing – not a pandemic, not rising interest rates – seems to do much to dampen the housing market. Amazing, that is, unless you forget that the entire focus of political pressure over the past 40 years or so has been designed to keep house prices from falling, or even abating.
Given that, it is little wonder that Australians continue to think buying a house is a good financial decision and the cost of loans continues to rise:
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Average mortgages over the past two years have been relatively flat but that came in the time that rates rose faster than they have in 30 years, and after the absurd price growth in 2020 and 2021. And even then the flatness mostly occurred in New South Wales and Victoria, while Queensland and South Australia especially have seen little sign of a pause:
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It says something that rising interest rates by 425 basis points only served to dampen house price growth but not really lower them. And that dampening should now be over.
The latest figures are from November – the last month in which the RBA raised rates. And since then, the outlook has changed rather dramatically.
Just before the last increase, the market was expecting that the Reserve Bank would raise rates but only some time early this year. Investors then predicted that by early next year the RBA might be a chance to cut the cash rate back to 4.1%.
Now investors believe the RBA will cut rates to that level by August with another cut before the end of the year and another one in the first half of 2025:
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This would of course be very pleasing news for homeowners given since the increase in rates there has been a big shift in the number of people taking out fixed-rate loans.
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Australians, unlike Americans, have always preferred variable home loans. Generally, about 85% or so of home loans would be variable. Early in the pandemic, as rates crashed to record lows, more people locked in those rates. But as rates have risen, the number of people taking out fixed-rate loans has plummeted.
Last November only 2% of all new home loans were fixed rates. That means almost all new homeowners would benefit from lower rates.
Of course, before breaking out the champagne, it is worth wondering why the market expects the RBA to cut the cash rate.
Central banks don’t cut interest rates because they think people deserve to pay lower interest rates, they do so because of the effect they think it will have on the economy.
If we wish to view the glass as half-full, the RBA would cut rates because it believes the current rate is slightly above a “neutral” setting – a point at which rates are neither stimulating nor restricting economic growth.
Most homeowners would think “slightly above” is rather a stretch given since the end of 2020 the monthly repayments on an average new loan have risen about 55% while over the same period wages have risen only about 8%:
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But as inflation returns to normal levels of about 3% the RBA would naturally think it is time to return raters to that “neutral rate” or about 3.8% – ie around two rate cuts’ worth.
By contrast, the glass half-empty view is that the RBA will need to cut rates because the economy slows by more than it hoped and unemployment is rising faster than it expected and so it is cutting rates to give the economy a boost.
Either way, it does appear the peak of interest rates has been reached. That will be good news for the government and homeowner, less so for those who were unable to afford a house even with the recent “flatness” of price growth.
Should prices once again take off faster than incomes, we may very well look back to now as the good times for housing affordability.
Greg Jericho is a Guardian Australia columnist and policy director at the Centre for Future Work
