Progress of the housing cycle
Earlier this year when the Reserve Bank was raising its official cash rate the view it gave was that the peak for its rate would be 3.5% in the middle of 2024. But at their most recent review in late-May they changed that to a peak of almost 4% and with that peak coming one year earlier in the middle of 2023. Why did they make this change in their monetary policy tightening plans and what are the implications for the housing market?
They have accelerated their tightening path and raised the projected endpoint primarily because the current and immediately prospective rates of inflation are/will be a lot higher than they were earlier anticipating.
Although there was a common expectation that some inflation would result from the loose monetary conditions of 2020-21, as luck would have it these forces are showing through at the same time as other unexpected factors are in play. Specifically, Russia’s invasion of Ukraine has caused global energy and food prices to soar. China's continuation of a failed eradication strategy for Covid-19 means ongoing supply chain disruptions which are incentivising businesses to permanently shift where they source products from – more expensive but more reliable countries.
With inflation currently at 6.9% the risk has grown of high wages growth which will keep inflation elevated for a lot longer than our central bank had been anticipating. Throw in a belated realisation that they should have started withdrawing monetary stimulus early in 2021 and we get a period when our central bank is both catching up on delayed tightening and trying to fight back against future inflationary pressures.
The upshot is that fixed mortgage rates have already risen 3% - 3.5% from their lows of about 15 months ago and extra downward pressure on our housing market is being applied.
But there is good news in this for the housing sector along with the bad. The bad of course is extra weakness in house prices and turnover earlier than anticipated. The good news is that because things have tightened at three times the speed of the last tightening cycle from 2004-08, we have about reached the peaks for all bar the one year fixed mortgage rate.
Come the end of this year we are increasingly likely to see the longer term mortgage rates falling.
For housing the implication is that we will reach the bottom in prices and activity levels earlier than previously expected. Lows are likely to have been reached before the middle of 2023.
What will be interesting to see is when buyers currently sitting on the side-lines watching falling prices and soaring listings decide enough is enough and re-engage. Cashed up investors are already showing some increased interest and are looking for bargains. But those needing debt to make a purchase probably won’t come back until next year and the extent to which they do will be influenced by the political opinion polls.
The National Party have said that they will restore deductibility of interest expenses when back in power. If this looks like happening at the general election late next year, then some new investor demand is likely – but only once interest rates look to be on a certain downward track.
For the terms most people will be looking to borrow at – one and two years fixed – that may not happen until mid-2023.
First home buyers may not re-engage until that timeframe as well as they have a tendency to take their lead from what others are doing.
All up, we can reasonably anticipate that for the rest of this year and into the first half of 2023 both average house prices and house sales will weaken. But the acceleration of monetary policy tightening and evidence already in hand of that tightening having a strong impact on consumer spending means the scene is already being set for real estate measures to improve from around the middle of next year.