Why Australian real estate prices are powering on after yet another rate hike

There is little evidence lifting rates will cool the housing market, but instead may actually be holding back much needed supply.

Rate rises may cool the economy, but there is slim evidence to suggest they will cool property prices.

Even over the long weekend when there should have been a lull in our rebounding market, early numbers suggest house prices may be heading higher for the fourth month in a row.

On the restrained volumes which hit the market over the public holiday, clearance rates remained at over 70 per cent.

Moreover, the pulse of the auction market is clear from strong bidder activity: As the Ray White group reported on average half the registered bidders at auctions went ahead and made a bid.

The ‘active bidder’ number gets us close to the heart of the market – Back in November last year the average active bidder number was closer to two (ie. two bids per auction). It is now close to three in Sydney, Melbourne and Brisbane while in Adelaide it is almost four.

Nerida Conisbee, the chief economist at the Ray White says what we are seeing is “not a dead cat bounce, but an earlier than expected return to growth”.

At CoreLogic, economist Kaytlin Ezzy, says: “The June rate hike may have tempted buyer and vendor confidence”, but the same report notes the significant improvement in clearance rates which were just 54 per cent this time last year.

With speculation around a recession there remains plenty for investors to be sceptical about in the current upswing: The market may be rising, but the increments are small: 0.8 per cent in March, 0.7 per cent in April and 1.4 per cent in May.

There are also fears around extended high inflation and ‘regulatory risk’ as state governments move to raise more revenue from the property market.

More broadly, there are those who hold onto the view that rate rises must ultimately kill the rebound ranged against those who say surging immigration and a lack of supply will keep pushing prices higher.

As that debate plays out, the economics team at the Commonwealth Bank, the nation’s biggest home lender, has reviewed its forecasts for the market after last week’s rate lift and made no changes. The CBA forecast is for a 3 per cent average house price rise this year and a 5 per cent lift next year.

Why are economists not cutting their house price forecasts if rates keep moving higher? A key reason, ironically, is that the rate rises are inadvertently extending the broader supply freeze in the market.

Every time rates lift, it becomes harder to build a new house. Less new houses (reflected in subdued building approvals) means more demand for existing housing stock.

In fact, as Chris Bedingfield of the Quay Global Investors group pointed out in a paper last year, history suggests that rising rates in the Australian housing market do not hold the market back.

Bedingfield pointed out that only an excess of supply would produce a risk for the market. However, backed by modelling that went back over a decade of statistics, Bedingfield suggested: “There has never been a situation where there has been an excess supply of housing in Australia.”

Bedingfield then challenged conventional wisdom when he raised the notion that prices can keep rising in a property market even when interest rates are rising in tandem. Bedingfield even went as far as to say: “In fact, rising rates may add to further gains.”

Which leaves a terrible dilemma for the Reserve Bank of Australia where more rate hikes feed the current imbalance between supply and demand. It also creates a major strain for home buyers and renters alike and what can only be seen as an opportunity for investors who are willing to enter the fray.

The issue for investors is the sudden rise in mortgage rates where homeowners pay more than 6 per cent and investors pay more than 7 per cent.

As Jarrad McCabe, a buyer’s advocate at Wakelin Property Advisory puts it: “It is a market that is pretty much in balance just now between sellers and buyers. But investors are very scarce in this market just yet.”

Originally published as Why Australian real estate prices are powering on after yet another rate hike