Property prices falling earlier than expected

For the cycle to start again, it has to properly end in the first place, otherwise it won't be called a new cycle. Right? We are quite far from the bottom of the downward trend which has just started (if we call this a cycle), before it starts going back up. And it's not going to be super quick. Cycles don't finish in a few months normally.

 

Agree, never said in months. I predict around 2-3 years end of 2024?

 

Just like MR cut, boosts BC,
MR hike, cuts BC,
In a market driven by highly leveraged buyers, BC act as the hard limit for prices set at margins.

What if 2% hike doesn't translate to broad-based job wise recession?
ie policy makers realize the diminishing returns of capital in pumping existing supply,
instead they limit the juice to pump only on supply side aka boost jobs which comes with new builds,
it will be popular jobs wise, supply wise it will appear to address the rental stress?
aka for the same buck gov gets more bang?

 

Here is what I am seeing from the next 2-3 years:

1. I reckon interest rates will be up 1.5-2.75% from the current 0.35% RBA rate. I can't see the RBA rate go much past 3% otherwise it will be catastrophic for a lot of mortgage holders.
2. Rates will be 1% by Dec 2022
3. I see the cost of things like food..insurance...cars...etc by 15-25% over the next 2-3 years.

So lets use an average family of 4 in Sydney on 145k (72.5k each) will have a net income of about 120k. They also have a mortgage of 6 times income (DTI) which is 870.

On current income their mortgage payment at 2.5% PI is about 41k per annum of bang on 33% of income ..the family has about 79k of disposable income to spend on other things.

Assuming prices go up 20% over the next 3 years and pay goes up 10%. And mortgage rates to to 4.5%. Their net income is now about 130k. Mortgage is now 56k pa. Thus leaving their income at 84k....but then add to that 20% increase in living costs (assuming they spend 70k)....they are up for another 14k COL costs. Thus their disposable income drops to 70k...which is less than a couple of years ago....at this rate you have deficit of 10k..and it gets hard.

This is only a scenario ..but this is what inflation does to people.

 

That is not a fundamental as to the limit of rates rising. It will be the the effect of higher rates to curtain spending esp on property or using credit.In the early 90s rates rocketed up far far higher towards and above 16% needing govt support to assist home owners. The RBA wants a certain amount of pain points

 

I have based this on what I think the Fed in the USA and BOE in UK are likely to get to to contain inflation.

If we reach 7-8% inflation in June I would envisage a larger rate increase.

 

I hear you on inflation.

The other argument that I lean towards, is that we are already 5 months into a technical recession, and Wall Street is throwing a tantrum over 0.75% increase. My guess is that this isn't going to go anywhere near where you think it will in terms of interest rate increases, and instead, we will just need to get used to inflation around 4-5%. Because to properly reign in inflation means breaking something far bigger.

Central banks have created a complete mess over the last 20 years, and so there is no easy way out of this.

What they will definitely NOT do is risk crashing the property markets and in doing so, wipe out the banks' collateral and their governments tax base in the process. We even see NZ reversing course and lifting limits on FHB grant. A system over leveraged can't tolerate falling asset prices.

They will talk about killing inflation, but they can't complete their mission. So the interest rate increase cycle will be short lived, and I actually think that the property markets will do okay in the second half of the year when this becomes apparent.

We will see.

 

I am of the opinion 2-3% will do its job. But there will be fall out. 10-20% drops are a dead cert at 2%....at 3%...it could hit 30%.

 

I think looking back a drop from 2% to 1% (difference in rates) created around 30% difference in rising market so it will be interesting to see where reversal will take us?

 

I hear you. And I think if they were serious about inflation, yes, 2%-3% would do the job. Where I think you are wrong, is that I don't think the central banks will sit back and watch the falls in property/asset prices that would be necessary to bring inflation down.

Reasons per the above: pension funds would hit the roof, governments would lose their tax base, and banks lose their collateral.

Heck, I could be wrong, but I am just trying to join the dots far enough in advance, which I think includes a big policy reversal.

 

The reversal will affect the people who ratcheted up debt the most.

 

In theory you are 100% correct..... issue is many times before central banks have gone to far with dire consequences.

 

20-30% drop would bring us back to 2020 prices if the rba has to choose between 5% inflation and 2020 asset prices i think they chose 2020 prices.

 

Not a disaster...but a lesson for all the FOMO buyers

 

That's right. Having high inflation makes them look like they aren't doing their job.
Having falling property prices, they shift the blame to Apra.

 

i think interest rates will be high for some time, but wages will catch up within 12-18 months so it will become a new normal. I say this through the eyes of someone working in renewable energy - we are about to enter the era of sustainability, and the level of development and growth needed for it is genuinely hard to comprehend.

Consider these points:

• currently Australia's entire electricity consumption comes from about a 50gigawatt (GW) system. A market set to take off in the coming decade is green hydrogen - hydrogen gas made from renewables. consider that some developments being proposed in Australia are 30-60GW each.. a single hydrogen project immediately doubling Australia's energy industry. Physically, each will be a field of wind turbines larger than metropolitan Sydney, each as tall as the Rialto Towers.
• Australia's renewables industry is just over 20% of the electricity we consume. it needs to grow 5x just to meet what we need today
• An average house uses around 18 kWh a day. an average electric car has a 70kWh battery. Charging two cars once a week will more than double a household's electricity consumption
• Lithium. Last year WA received more in royalties from lithium than any material other than iron ore. The industry is only just starting, and is already blowing gold, copper, zinc, and everything else away. In 2017 the 100MW/127MWh tesla big battery was built in SA. today there are a multitude of batteries being built in Australia up to more than 2,800MWh each, 20x the size of the Tesla battery the world got excited about only 5 years ago.
• we've hit tipping point where the major oil and gas companies are jumping in. BP, Shell, Ampol, Fortescue, take a pick - each throwing $billions to get ahead. The worlds most valuable car manufacturer is all electric. One of the worlds largest ore miners is going green by 2030. As of this year it is abundantly clear that the world's largest companies want to lead the climate revolution.

This is truly the third great revolution of energy in modern times. Steam got factories and trains going, oil & gas put cars in driveways and planes in the sky, and now renewables will bring the electrification of everything we know. The world is demanding it will be done by 2050, which doesnt leave much time to effectively rebuild everything we've ever built at over 2x the scale.

I totally get that this sounds like a futuristic ramble, but to those in the industry, the writing is on the wall and its already happening.

Why is this important for house prices? because for the next 1-2 years, people will continue to doubt whether inflation could possibly last. The scape goat for governments is going to be climate policy, so they'll have no choice but to act this term. Once they're in place, it will become absurdly clear that we will need more steel, more lithium, more copper than ever, that every second house in your street will be thinking about an electric car, that professional services firms will not be able to hire enough people to keep up with global renewable electrification, carbon policy, and everything else that goes with it. This isnt an australia thing, its a global thing - and for that reason we cannot avoid or escape it. It will cause global inflation and we will be the biggest providers of minerals to achieve it - that means our interest rates will be going up with everyone else's, regardless of what our local house prices are doing.

The period of low inflation is over. Come 2024 people will have adjusted to inflation being a part of every-day life, we'll remember that money in the bank devalues, and we'll enjoy a decade or two of serious inflation. Really, 3% will feel low.

 

Definitely possible...... RBA does not care about house prices. All they are about is a stable economy.

They know a 30% drop will affect houses but need to balance with confidence...but it might be not be all states just the ones which overshot. They key is to ensure business funding is supported whilst there maybe a crimp on house prices.

 

If that continues..... then I am selling up and putting it all into term deposits.

 

"20-30% drop" with the prices of new builds skyrocketing and mass vacancy rates of 0.5%... I strongly doubt it.

sash, why not in stocks?

 

Yes but observing that market as it falling also. I plan to DCA in dribbles. Market has come off 10-15%