Daily Commentary BY THE CURVE TEAM –

House Price Falls Accelerate as Pressure on Rates Build

2nd of August, 2018

A day after the RBA reported that outstanding investor credit fell for only the third time in more than 30 years, CoreLogic reported house prices falls at the national level have accelerated. It comes as upward pressure on interest rates continues to build.

What started in Sydney 12 months ago and then spread to Melbourne has now gone national with house prices falling by 0.6% in July. It now means house prices at the national level are also lower than they were 12 months ago. What makes this fall in prices more significant is that it hasn’t been driven by tightening monetary policy.

There are a number of forces at work that are providing headwinds to the housing market and some are yet to show their full effect. It all kicked off with tighter lending restrictions around investors and interest only lending. Since then we have seen tighter lending criteria around expenses for mortgage applications, triggered by the royal commission, which is also effecting refinancing.

Increased funding pressure has also been putting upward pressure on mortgage rates as lenders look to claw back the increases in funding costs and protect their net interest margin. Still to come is the large pipeline of interest only fixed mortgages set to expire over the coming year which will see many forced to switch to principal and interest while self managed super lending is now in the firing line.

Adding to falling house prices is falling rents. Vacancy rates here in Sydney are at the highest level in 13 years. The result is a large number of properties sitting vacant and landlords dropping rents to entice renters. It suggests that uplift in construction that helped the economy transition away from mining led growth is starting to show up as increased supply in the property market.

The deteriorating outlook for the housing market comes at a time when there is upward pressure on interest rates at the global level.

Overnight the US Federal Reserve held their latest meeting and with no press conference scheduled this time around, hence, no change of policy was expected. While the statement released at the conclusion of the meeting continued to point to the strength of the US economy, there was little mention of the risks to the outlook from ongoing trade wars and the softening of the US housing market.

The Fed is still expected to hike at least once and probably twice more by year end. The European Central Bank will also bring to a close its quantitative easing by year. The Bank of Japan, despite reiterating its commitment to yield curve control has let its 10 year bond rate drift higher. The Bank of Canada and Bank of England are still expected to lift rates over the near term.

As a result we have seen long bond rates drift higher overnight. The US 10 year yield broke back above the key 3% level. Yields in Europe were higher and the 10 year Japanese government bond hit a high of 0.13% despite the BoJ’s commitment to keep it near zero.

The big question for the RBA is how far can it let the rest of the globe move as it sits pat?

David Flanagan

Director - Interest Rate Markets