At the rental level, things have soured but not as much at least on the data.
“Rental affordability at the median household income level has worsened, but doesn’t look as severe as mortgage serviceability,” Owen said.
Philip Ryan of Trilogy Funds pins the problem on a combination of rapidly rising rates, a lack of new housing supply, and anaemic wage growth (or in this high-inflation era, real wage losses).
“These periods of time do repeat themselves but this one will be traced to interest rates and a lack of supply,” he said. “I also suspect we will continue to see this problem persist until we start to see wage growth. The one rider on that is people now have so many more opportunities to multiply their income,” he added.
Ryan also has another view – Australian property was actually always unaffordable.
But he doesn’t deny the last five years have made things much, much harder.
“In the last 12 months, interest rates have gone up markedly and first home buyers now have 30% less purchasing power,” Ryan said.
Our man at Yard informs us that depending on circumstances and the size of the loan, a 0.25% rate hike could trim between two and four percent (2-4%) off your borrowing capability. So had the RBA started hiking interest rates earlier, could this crisis have been lessened or mitigated?
Yes and no.
“The RBA was highly stimulatory and the Government was also highly stimulatory during COVID’s outbreak,” Ryan noted. “In many ways, what they did was the right thing to do. Otherwise, we could have ended up with another Great Depression,” he added.
But they were tripped up by Governor Philip Lowe and the forward guidance which later proved to be the opposite of prescient.
“The RBA is forever trying to do its job in the rear view mirror,” Ryan said. “I can understand their position being complicated and difficult but a rapid change in rates has exaggerated the problem,” he added.
Ryan’s base case – which in turn leans bullish – suggests the seeds for the next property boom are being sown now.
“We have reduced building activity, some builders have collapsed, and there are difficulties with trades and council approvals. There is a real lack of product supply coming to market,” Ryan said.
Ryan goes on to add that while achieving the terminal rate is important, he also believes there should be an inflection point when it comes to continually increasing rents. His view is that the next boom will occur when first home buyers decide it’s cheaper to buy than rent and when investors are drawn back into the housing market because of increased rents.
Owen is less sanguine, arguing the ‘bottom’ is likely going to be dependent on how fast the RBA transmission mechanism does its job.
As for the top markets where the buying may restart, she points to Western Australia, the Top End, and the leafy suburbs of Sydney.
“Our expectation is that regions with favourable migration trends and strong rent return, including resource-based markets across WA and the NT, will have mild declines through this cycle,” Owen said.
“On the east coast, it is expected that desirable, high-end owner-occupied markets will be the first to show signs of recovery, such as the North Sydney and Hornsby market of Sydney, where large family homes have seen relatively sharp price falls, and may become appealing to buyers once interest rates stabilise,” she added.
We were talking earlier about the Reserve Bank and whether specifically all the blame should be put on Phil Lowe. Well, if the RBA’s communication is anything to go by, perhaps not. This chart from John Bromhead at ANZ finds that mentions of housing have declined in recent years – which must go some way to explaining what the RBA is more focussed on.
If inflation comes down and the RBA reaches its terminal rate, it’ll be interesting to see if these mentions tick back up.
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