House Prices vs Interest Rate Data

Hi guys,

I've been thinking lately about the main drivers of housing growth, and I believe the main ones are population growth, interest rates and APRA regulations. I have attached the table I prepared quickly showing percent growth change in Sydney, Melbourne, Brisbane and Perth (S, M, B and P in the table) versus percent cash rate change (CR).

The trend is not very clear. As an example, it would seem that cash rate increases have suppressed Sydney market between 2005-2008 but Melbourne and Brisbane kept going quite strongly over this period.

What are your thoughts?

Cheers!

 

Where's SA? lol

 

I don't know either, where is that? Lol

Sorry will add the data for other cities at a later stage, this was just in a rush as I'm only interested in the 4 biggest capitals.

 

Sydney's prices did seem most impacted by interest rates (which I guess is not surprising given it's the most expensive capital city):

 

There is always a lagging effect which is harder to visualise.

 

What causes this lagging effect if you wouldn't mind sharing?

 

Thanks Bullion.

A question for you if you wouldn't mind. I have noticed from the attached table, when the gap between Sydney and other capitals becomes large enough, that Sydney prices stagnate and other capitals pick up until the gap narrows down. However I only trended this from 2000-2015. Would you know whether this was a regular pattern in the cycles prior to 2000?

I would also be interested to hear your view as to why this happens (e.g. Melbourne, Brisbane and Perth ramp up after Sydney stops growing)?

Thanks.

 

Correlation doesn't prove causation. In Sydney, from 2013 to 2016 (ish) we see interest rates falling at the same time prices boom. These show a correlation between the two factors but does not provide evidence that the low interest rates caused the boom.

At the same time, in Perth, interest rates fell and so did property prices. Did falling interest rates cause property prices to fall? No.

Sydney and Melbourne were relatively stagnant when Perth boomed. Why? Jobs and money. During the mining boom, people moved from Sydney and Melbourne to work in WA. During the mining boom, the population of WA increased rapidly and there were a lot of jobs and money flowing in the economy. As a result, the housing market boomed, in Mining Towns and in Perth.

Post mining boom, people moved back to Sydney and Melbourne, jobs fell and there was less money flowing in the economy. Mining town and Perth property markets collapsed. Sydney and Melbourne boomed.

Was it ever about interest rates?

 

They don't have daylight saving time so are trapped in a different timezone

 

There are cycles, but low rates will pour fuel on any fire.

Also low rates will have people jumping into popular markets first, but as the prices increase, they will start to look elsewhere or stop.

Supply and demand do play a big part too, so low rates and too many choices and lack of buyers still equals poor performance.

So there are many things to consider.

 

Yep.. that's it

We are trying to correlate the cash rate and the price index at each point in time. But that doesn't happen in reality.
Say the cash rate is increased by 1%. Would the price index change immediately? No. Would the change in price actually come into the statistics? No... it takes a while for the records to be updated.
After a shock, generally, there is a short-term effect. This is the higher but more prevalent. It would still take few months to absorb this shock. For example, people deciding not to buy a property.
Then, there is a long-term effect. This is more like a permanent effect. For example, people slowly adjusting their loan structure or deciding to sell a property.

 

Don't have data going much further back than 1990s for most capitals, but here is a ratio showing Sydney / Brisbane and Melbourne house prices which shows the cycles / relationships between prices over a longer period. I think the answer to your question is 'yes', there are patterns to the cycles (Sydney outperforms then other capitals catch up, but it's not an exact science).

Can't be sure, but likely after investment capital races into Sydney property and investors feel the city has peaked, they start buying elsewhere... swings and roundabouts.

 

Where did you find that graph by the way?

 

I created it in Microsoft Excel.

 

Awesome man, I love that graph!

I think history is just another tool to be used in investing, not in isolation by itself. Like @Perthguy said, there are more factors to consider. Just because the ratio Sydney/Perth is huge now, it doesn't mean we should invest in Perth. However, I'd say Brisbane is another story

 

Perth is good Perth is good now. Just depends on how long you long you want to wait for capital growth!

 

Hi Bullion,

Would you be that kind to share the raw data for the 4 biggest capitals? I only have two separate sets of data and when I put them together they don't make sense.

I would love to trend them and play around with them a bit. I'm on the borderline whether to invest in Melbourne or Brisbane, or not to invest at all. I think the data would provide me with better understanding of the markets.

Thanks a lot.