The housing cycle has turned. Regulators have been spooked by a slowing economy and are about to turn on the gas burners. Demand for housing is set to increase quickly over coming months. Here are the big reasons why: 1. Interest rate cuts to drive affordability and demand for housing: This will be the biggest driver of demand increases. An 0.25% cut is now a near certainty, with an 0.50% cut in interest rates likely. This will drive OO mortgage rates near 3.25% and INV mortgage rates around 3.75%. Affordability will be significantly improved as a result. RBA research appears to indicate a 1% cut in the interest rate leads to a 28% change in house prices Rate cuts work by increasing nominal asset prices rise. For example: Sydney house prices rose 15-20% from mid 2016 to mid 2017. This was immediately following an 0.50% cut to the interest rate (May & August 16 rate cuts) and in a similarlending climate. The 40-60% appreciation in Sydney house prices from 2012 followed a rate cutting cycle from a 4.50% cash rate to 2.00% cash rate (from late 2011-2015). In reverse, the 2010 slowdown in Sydney housing followed a large 1.75% increase to the cash rate. 2. Borrowing power improvements coming: The proposed assessment rate change by APRA allows banks to lend more money. Combined with rate increases, borrowers will have an increased borrowing power of between 5-20%. Overall lending verification is stricter but borrowing power will near the strongest its ever been for large segments of the market. Combining the first two points – history suggests every time Australian regulators allow for more money in housing, Australian’s take it on, and house prices inevitably rise. 3. No changes to taxation imminent: No changes to negative gearing or capital gains tax will help improve housing sentiment. It’s difficult to measure what impact this has had, but the removal of the prospect of this should improve sentiment. 4. Price base is 10-20% lower: The current price level is already attracting more interest. Without the above interventions, the market was naturally correcting and finding a stabilisation point around this mark. 5. Interest only loans no longer a structural issue: The stock of interest only loans is around 25%. This adjustment has seen 15%+ of ALL mortgages in Australia convert to Principle & Interest repayments. This macroeconomic adjustment is now over, with the stock of IO loans similar to new IO loans being written. It is quite likely IO loans will become more popular again as pricing spreads tighten. Previously I noted Australia had a debt problem. This has now been resolved. Nonetheless, the changes to interest rates & assessment rates may be fuelling the next big debt problem. 6. Fiscal policy support: Permanent income tax cuts will begin to hit the economy in Q3/Q4 this year providing support to demand. Net disposable incomes will rise as a result, further helping affordability. The above six factors are all demand side factors and will drive confidence/sentiment. What is happening to supply will dictate whether the above leads to material price increases. Downward pressure on supply: Existing property ‘new’ listing are very low at the moment: At the moment stock levels are dry for the limited buyers in the market. As more buyers enter the market, stock levels will continue to be an issue. This will drive up prices, particularly of existing dwellings. This is because new listings are down over 20% through the course of the year Upward pressure on supply: OTP & New property settlements: Unlike the 2012-2015 boom, Sydney and Melbourne don’t appear to have a significant supply shortage. Current levels of supply entering the market are likely to meet or exceed ‘structural’ levels of demand (i.e. new entrants, etc). Upward pressure on supply: Is there a large ‘ghost’ supply? There is likely to be a lot of sellers who are also waiting in the wings for some improvement to the market before selling. Developers look to be doing the same, holding off on marketing and selling projects until the market improves. It’s quite possible there’ll be a big supply side response to meet the increase in demand and prices won’t run away as a result. Prediction: The above will play out in 2019/2020 and will lead to a 5-10% increase in house prices nationally. Supply will eventually respond to stabilise prices. This appears to be an outlier prediction that goes beyond those suggesting that the above conditions will mean house prices no longer fall. Noting the 2019-2020 impacts, pumping money into the housing market usually leads to debt fuelled binges and may create the longer term seeds of Australia’s next debt problem.