The Federal Election and interest rates
By prominent property commentator, Michael Matusik:
Don't forget to vote on Saturday.
For the record, Australian federal elections appear to have little impact on the housing market. Yes, the last five weeks or so have been slow; painstakingly so, in Queensland; but the sluggish market reflects wider trends rather than just the calling of an election. Any truly election-related slowdown in inquiry and sales, should in coming weeks, rebound, balancing things out - at least over the short term.
The latest price growth figures show that house prices are growing only a little bit, with a 2.4% movement over the last three months compared to close to 16% over the last year. Brisbane's price growth is the slowest, barely moving at all during the June Quarter and at half the rate of the rest of country during 2009/10.
We built a case in our last three Matusik Snapshots outlining why Australia's housing market is not as undersupplied as most housing commentators believe. In addition, population growth - despite the nonsensical federal debate - has already peaked and is also falling faster than most voters realise. Also, for the first time in almost ten years, the number of investors expecting house prices to remain flat or fall outweighs those who see prices rising. The Economist last month dubbed the Australian housing market "the most overvalued" of the 20 it studied.
If our take on things is correct, then the best outcome for the Australian housing market in coming years is a "muddle-through" scenario where overvaluation is resolved by little growth in end prices and rents, supplemented with wage growth, some fiscal support and a low interest rate environment. If interest rates rise too fast, economic growth slows and/or housing demand slumps and then we could see a sharpish drop in house prices down under.
So we can breathe a sigh of relief that interest rates remained steady earlier this month. Michael Workman, senior economist with the CBA put it best when he said, "During election campaigns governments pray to the statistical gods for low CPI results. Even the atheists, apparently. Earlier this month, their prayers were answered." It is rare these days that an economist can make me smile, let alone laugh!
I could argue that, if you were using the housing market was a barometer of economic health, that there is a good case to drop interest rates and not lift them. But Michael and his mates still think that rates will rise. The working consensus is another 0.25% lift sometime this calendar year, with a full percentage rise by the end of 2011.
Our analysis of interest rate rises since the early 1970s, against four key residential market measures, suggests that a 0.25% rise in interest rates can cause:
housing starts to fall by 2.5% over a twelve month period after the rate rise,
house prices to drop 1.5% (often quickly - within six months - after the rate rise),
sales volumes (across south-east Queensland at least) to drop 2%, again over a twelve month period after the lift in rates, and
confidence to fall by 2.5%, and again this usually happens quickly after the rate rise.
In keeping with last week's missive, if you asked me to place a song title on the Australian residential market, "House of the Rising Risk" would be apt.
Source: Matusik Missive - Interest rates. 18th August 2010