Where next for house prices?

by Shaun Richards

This week is one where we have seen the fingerprints of central banks all over events so I thought it was time again for us to look at their main priority, which is of course house prices. Last night the meeting Minutes of the US Federal Reserve told us this about expected future policy.

In discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing
increases in the target range for the federal funds rate
would be appropriate to achieve the Committee’s objectives. In particular, participants judged that an increase
of 50 or 75 basis points would likely be appropriate at the next meeting.

So they planned to keep going with their interest-rate increases which in theory at least will apply pressure to house prices via mortgage rates.

On Tuesday we saw the Reserve Bank of Australia or RBA add to its interest-rate increases.

At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 1.35 per cent. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 1.25 per cent.

If we skip the silly fiddling with interest-rates that leaves them with a main policy rate of 1.35% the message is clear here too.

The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.

Aussie House Prices

These got a mention in the release and there is something going on.

 Housing prices have also declined in some markets over recent months after the large increases of recent years.

We also got quite close to a confession of how important they are to the RBA.

The Board will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy.

We can go to the Sydney Morning Herald to find out what has happened recently.

Recent property price declines appear to be accelerating.

Sydney house prices dropped 1.8 per cent in June after a 1.1 per cent fall in May, CoreLogic figures show.In Melbourne, house prices dropped 1.3 per cent in June after a modest 0.8 per cent decline in May.

Furthermore expectations are very downbeat.

Before the latest official rate increase, some analysts were forecasting property price falls of between 15 per cent and 20 per cent in the two major capital cities.

ANZ’s latest forecast for Sydney prices, released in mid-June, was for a decline of up to 20 per cent by the end of 2023. In May, the bank was forecasting a fall of only 15 per cent.

The bank’s economists expect Melbourne prices to drop by 15 per cent. In May, the estimate was just 11 per cent.

The Commonwealth Bank is forecasting both Sydney and Melbourne house prices to drop as much as 18 per cent by the end of next year.

They put the driving force as being mortgage rates.

We are primarily funded by readers. Please subscribe and donate to support us!

The widely anticipated official rate increase – if passed on in full to mortgage borrowers by lenders – would add about $140 a month in repayments on a $500,000 mortgage over 30 years, figures from Canstar show.

Combined with the two earlier rate increases in May and June, monthly payments have climbed more than $350.

The rhetoric from the RBA has them projecting this.

Canstar figures show that if the cash rate were to reach 2.5 per cent, the average variable-rate mortgage would hit 5.15 per cent – about double the levels of fixed-rate loans only a year ago.

Although their doom and gloom does require some perspective.

Even a 20 per cent decline in dwelling values would take the national index back to only January 2021 levels.

This returns us to the issue of how unhealthy it was that central banks pumped up house prices in the way that they did post Covid.

The UK

We can pivot to an entirely different perspective with this from the Halifax earlier.

The UK housing market defied any expectations of a slowdown, with average property prices up 1.8% in June,
the biggest monthly rise since early 2007. This means house prices have now risen every month over the last
year, and are up by 6.8% or £18,849 in cash terms so far in 2022, pushing the typical UK house price to another
record high of £294,845.

According to them we seem to be still in “The only way is up baby” territory. Although the more buyers than sellers style analysis is rather lazy.

“The supply-demand imbalance continues to be the reason house prices are rising so sharply”

It seems that there is one rule for the rich and one rule for everyone else.

In contrast, higher earners are likely to be able to use extra funds saved during the pandemic, with latest industry data showing that mortgage lending has increased by the
highest amount since last September…… One of these remains the huge shift in demand towards bigger properties, with average prices for detached houses rising by almost twice the rate of flats over the past year (+13.9% vs +7.6%).

In a nutshell you have my critique of central banking policy as it leads to the rich getting richer and the rest getting poorer. As to the increasingly literally poor first-time buyer they face this.

Our latest research found that the strong rise in property prices over the last two years, coupled with much slower wage growth, has already pushed the house price to income ratio up to a record level.

Interestingly the fastest house price growth in the UK at the moment is from the area that is supposed to be in turmoil.

Northern Ireland once again topped the table for annual house price inflation, up by 15.2%, equating to an
average property price of £187,833.


The conventional analysis is simple. It is along the lines of what I have looked at for Australia where higher mortgage rates have already caused house prices to decline and they are expected to fall further. However my home country which in terms of official interest-rates is very similar ( 1.25%) we have a different situation with the Nationwide reporting monthly growth of 0.3% and now an extraordinary 1.8% from the Halifax.

The next factor is that the situation for bond markets and hence future mortgage rates gas changed as I analysed on Friday. The real news from the quote below is that in spite of the rhetoric from the Federal Reserve Minutes the ten-year yield has not so far even regained 3%.

The yield on the benchmark 10-year Treasury note rose over 6 basis points to 2.979%, while the yield on the 30-year Treasury bond was up 4 basis points to 3.165%. ( CNBC )

In short they are looking through the inflation fears of 2022 so far and also pricing in recession fears. That means the path for mortgage rates now looks lower and whilst house prices should fall such falls will now be smaller.


Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.