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House Prices Could Still Double, Even With Interest Rate Rises

House Prices Could Still Double, Even With Interest Rate Rises
March 21, 2022 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Believe it or not, even with rising interest rates and inflation on the horizon, the median house price in many Australian locations could double in value over the next 6-years.

Genuine property market experts (as opposed to generalists such as banks and economists) understand that real estate performance has never been a ‘simple formula’ of asset values rising when interest rates fall and vice versa.

History is proof that, this time 20-years ago when Australia last had a national property boom, variable home loan interest rates increased 22-times in 6-years, yet the median house price in most locations more than doubled.

Brisbane produced 127 percent capital growth during that 6-year cycle of interest rate increases. Two other capital cities did even better.

The below chart contains 50-years of evidence that property prices increased in most years that interest rates rose.

How the property market of an individual city performs from one year to the next is always determined by the combined sum of literally dozens of influencing factors. Interest rates are just *one* of them.

Below is a visual summary of the various factors likely to have a ‘drag’ and a ‘lift’ on property markets during the 2022 calendar year.

There needs to be five (5) RBA rate rises just to get back to where interest rates were 3 years ago (and property owners comfortably serviced their mortgage).

It is nothing more than baseless BS to think a big critical mass of mortgage holders will suddenly struggle when interest rates rise.


50-years of evidence

Interest rate rises were extremely common throughout the 70s and 80s. The standard variable rate home loan rose from 6.5 percent in 1970 to 17 percent in 1990.

Fast-rising interest rates did not stop the median house price ballooning in every location across Australia. For example, the cost of a standard house increased 8-fold in Sydney (from $18,000 in 1970 to $147,000 in 1990) and in Hobart (from $11,000 to $83,000).

Since the turn of this century, there have been 2 cycles of rising interest rates in Australia.

In addition to the 2010-11 (post-GFC) rate cycle, there was a 6-year cycle of rising interest rates that commenced in May 2002. The standard variable home loan interest rate increased 22-times, from 6.3 to 9.5 percent.

Yet our shadow-jumping friends have been already spent much of the last 12-months expressing that they are ‘concerned’ and that property prices are about to flatline. #hypochondriac

During the aforementioned 6-year cycle of interest rate increases, the median house price more than doubled in value in over 100 individual Australian cities and towns, including 6 out of 8 capital cities.

Regional locations performed best in that cycle. The boom occurred from as far north as Cairns QLD (147 percent growth), to as far south as Burnie TAS and in Albany in the west (both 199 percent).

Six consecutive years of interest rate rises did not stop spectacular capital growth in coastal locations such as Warrnambool VIC (87 percent) and Port Lincoln SA (109 percent), along with many inland wonders like Goulburn NSW (103 percent) and Launceston TAS (166 percent).

Perth (147 percent) and Hobart (139 percent) were the strongest capital city property markets over that 6-years ending May 2008.

Real estate values also more than doubled in Brisbane and Darwin (both 127 percent), Adelaide and Canberra (both 103 percent).

Meanwhile, Melbourne (66 percent) and Sydney (26 percent) were the softest markets.


Beware your source of information

Let’s not forget that the same ‘experts’ currently predicting that property markets will flatline between now and the end of 2023 are the ones who made multiple (failed) doomsday predictions over the last few years. Yet the actual outcome was a real estate super-boom.

Waffle about debt-to-income ratios makes dramatic headlines. But official data confirms this metric has increased every year for 3-decades and it has not stopped the national median house price increasing from $100,000 to $800,000 over that time frame.

There are countless other metrics that hold *much* more significance to the overall health of household finances, the economy and property markets.

Truth be known, the net financial position of almost all Australian households today is far superior to a few years ago. And the current outlook for wage growth is the strongest in more than a decade.


Flush with cash and equity

I think it’s absolutely fantastic that a higher-than-normal volume of people have recently taken advantage of sizeable household equity, record low interest rates and job security and have upgraded their family home.

Life’s biggest lemon-suckers again say that they are ‘worried’ (this time about the size of mortgages).

A rational assessment of today’s situation recognises that banks are incredibly conservative when stress-testing loan applications, including a requirement to use a buffer of 12x 0.25 percent rate rises when assessing loan applications.

According to the latest RBA data, the average Australian with a mortgage is currently only using 4.4 percent of their household income to cover loan interest expenses. #StormTeacup

Of the 10.7 million residential properties in Australia, 1 million (or 7 percent) changed hands over the last 2 calendar years.

It is therefore reasonable to assume that circa 90 percent of Australian households have not taken on any extra debt at all.

In fact, a large portion of households have 20 to 45 percent more equity in their home today compared to 2-years ago.

More importantly, there are copious amounts of slack in most household budgets to absorb several interest rate rises. The RBA know that.

For many years, most homeowners have been paying well above their minimum required loan payment. The RBA has confirmed that.

The value of cash reserves sitting in facilities such as mortgage offsets and redraw accounts currently sits at $1.37 billion.

And Australia’s biggest home loan lender, CBA, recently announced that 35 percent of loans are more than 2-years ahead on mortgage payments. #DeepPockets

‘Mortgage stress’? Give me a spell.

Property boom still on the cards

Interest rate rises are inevitable but, in the overall scheme of things, they will still be dirt cheap for a long time.

Yes, it is widely acknowledged that the world has entered an inflationary period. From the price of petrol to electricity and a big bunch of stuff is on the rise.

This extends to the cost of materials and labour for construction of real estate and renovations (hardly a recipe for placing downward pressure on property prices).

The below graphic illustrates the change in real estate values compared to inflationary pressures over the last half a century.

On the flip side of rising inflation and interest rates is a nation at full employment, government and business revenues rising and the strongest prospects for wage growth in eons.

While a lot can happen within 6-months let alone 6-years, we do know that Melbourne and Sydney currently have the weakest property market fundamentals.

But many other locations (especially in the regions) currently have the strongest fundamentals they’ve seen in 20-years.

A dare anyone to point to a single year from the last 20-years which had a more impressive collection of fundamentals than those listed in Propertyology’s 2022 PROPERTY MARKET OUTLOOK REPORT.

The current volume of asset and cash rich buyers who have an insatiable appetite to improve their lifestyle is unprecedented. Exciting.

Meanwhile, Australia’s housing supply situation has (officially) never been tighter.

The 200,867 dwellings listed for sale now is a record low. The previous record (229,488) was this time 12-years ago when our national population had 4 million fewer people.

And rental supply in most locations is currently non-existent. This report illustrates there is no relief in sight.

Drawing on the background of a lifetime of formally studying Australian property markets history and detailed analysis of all current known factors, I’m certain that house values in most Australian locations will be much higher in 6-years’ time than they are now.

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