Vocal market commentor and fund manager, Chris Joye wrote in the AFR in November last year that Australian house prices could fall by 15% to 25% after the RBA starts increasing interest rates (here’s a
copy of that article).
Of course, there are many property doomsayers that perpetually (and often inaccurately) predict property market crashes. However, Chris is not one of these people. In fact, Chris’ predictions are usually quite accurate. However, on this occasion, I disagree with his prediction, and I share the reasons why below.
However, more importantly, I wanted to discuss what impact rising interest rates might have on the property market.
It’s interesting that almost everyone disagrees with the RBA
The RBA has persistently reminded us that it will not raise the cash rate until inflation is sustainably within its 2% to 3% band. And for that to be the case, the wage inflation rate must be sustainably in the 3% to 4% range, according to the RBA. Price inflation can’t remain sustainably high unless it’s supported by rising wages. Last week, wage inflation printed at 2.3% p.a., so we are some way off the RBA’s target.
Despite the RBA’s clear indication, the market stubbornly predicts that interest rates will rise quickly over the course of this year. In fact,
this chart shows the money market is currently pricing in 7 to 8 rate hikes (of 0.25% each) over the next 16 months. This seems over ambitious.
So, why would the market ignore the RBA’s commentary and price in more rate hikes? The RBA’s in full control of the cash rate, so shouldn’t we listen to it? It’s like your child telling all her friends that she thinks she’s coming to the party when she’s grounded. I suspect the answer is that markets are imperfect, especially in the short run.
It is worth noting that Australia is in a much different position to the US. In the US, inflation is very high (at 7.5% p.a.) which is underpinned by historically high wage inflation (at 4.5% p.a. which is a 40-year high). One of the main problems is that the
US participation rate hasn’t bounced back like it has in Australia and other countries, which res
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