House prices are falling and interest rates are a chance to no longer be rising. Life moves pretty fast in the housing market, except when it comes to affordability, which over the past year has only very slowly and very marginally improved.
Two weeks ago you would have been able to sit back and sagely tell listeners that the Reserve Bank of Australia was going to increase the cash rate at least three times – first to the current rate of 3.6% and then to keep going all the way up to 4.35%.
Now that same audience would hear from your very sage voice that actually what you meant to say is the RBA is going to cut rates:
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What has changed?
Not a lot, to be honest.
The fundamentals of our economy – falling real wages, maybe rising unemployment, inflation falling from its peak, and weak GDP growth – is as it was then.
The big change was not here, but in the United States where the Silicon Valley Bank collapsed and sent the markets into a bit of a panic.
One way to gauge panic is to look at government bonds. When investors are worried, they put their money in safe areas – such as gold (which has seen a price jump) and US Treasury bonds (because the US government will not go broke).
When the demand for these bonds increases, the interest rate needed to get people to buy them falls. And that happened quite abruptly this past week after the SVB collapse last Friday:
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Why does this matter to us? Well, as with most things, whether it be fashion, music or nuclear submarines, Australian interest rates largely follow the US.
And this has been a major reason why the market is suddenly predicting an interest rate cut. If rates in the US fall, it affects bond yields (or interest rates) in Australia, and that affects the market projections for the cash rate.
As to whether the RBA will raise the cash rate or not, who knows? The situation, as they say, is rather fluid.
But these ructions in the US do give the RBA a reason to pause the rate rises, even though just a month ago it was saying a plural number of increases were on the way.
They also can point to the latest dwelling price figures released on Tuesday by the Bureau of Statistics which show that prices are falling as fast as they have for a decade.
In Canberra dwelling prices fell 9.5% in 2022, while in New South Wales and Victoria prices fell 7.3% and 7.8% respectively. Only in South Australia and Western Australia were average prices higher at the end of 2022 than at the start. But even there the growth is slowing quickly:
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This is not a shock. The sharp fall in home loans meant prices would follow, and will likely do so for a few more months:
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The price fall, however, has mostly come in houses rather than apartments, but that is because the surge in prices since the middle of 2020 was also in houses. In all capital cities, the median price of houses since the end of 2019 has risen by more than that of apartments:
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The key point, of course, is that house prices everywhere are much higher than three years ago. Indeed, while prices have fallen in the past year, in every capital city, median house prices are still higher than they were even at the end of 2020:
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This means that housing affordability remains much worse than it was before the pandemic.
Consider that from December 2020 to December 2022 the median house price in Sydney rose 26% from $1.01m to $1.27m, while at the same time NSW wages rose just 5.8%.
Sure, house prices have fallen, and it probably is more of a buyers’ market now than a year ago, but let’s not start suggesting millennials should be flush with opportunity to buy a home.
The Sydney market has a decade of absurd growth to undo. Had Sydney median house prices risen along with wage growth as it roughly did from 2003-2013, the median house price would not be $1.27m but $836,000.
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That $434,000 difference represents the massive housing affordability problem in our largest city, and it is replicated in all others.
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The ructions overseas might give the RBA reason to pause rates, and that may arrest the decline in house prices over the next few months. But the problems of housing affordability require more than a decade of damage to undo, and until wages consistently rise faster than prices, little will change.
• Greg Jericho is a Guardian columnist and policy director at the Australia Institute’s Centre for Future Work
