History will record that the boom in residential property throughout the world in the last 18 months was unpredicted, unprecedented and unsustainable. The nail in the coffin occurred during the week when the Reserve Bank announced an increase in the cash rate of 0.25% which broke a 10-year trend of ever decreasing interest rates. Over the next 18 months interest rates will rise but not to the extent that many “doom sayers” are suggesting.
The blunt instrument of using interest rates to control inflation was a proven method adopted in the decades of the 1970’s and 80’s when over-consuming Baby Boomers were, through excess demand, out stripping supply. The recent inflation figure at 5.1% has two components, discretionary and non-discretionary items. Non-discretionary items include the staples of food, clothing, rents and petrol while discretionary items are indulgences of overseas travel, new motor vehicles and jewellery. Within that inflation figure the non-discretionary component was 6.6% and the discretionary 2.7%. This clearly indicates that the staples that we consume on a daily basis is the main driver in the 5.1% figure whilst indulgences are not a major issue and people are not over consuming. Therefore it can be argued that although the use of interest rates to curb the current spate of high inflation may be necessary it need not be for as long as economists expect.
The question has to be asked “would interest rates be rising today if it were not for the Pandemic”. We all know that the Pandemic brought on a whole range of issues that are now reflected through the current inflation rate exampled by supply-side disruptions, the Ukraine war, floods, wildfires and the cessation of immigration. We will learn to live with the Pandemic, the Ukraine war will end (when someone from within Russia puts Putin out of his misery), migration is already being restored and the supply chains are starting to catch up. The gap between discretionary and non-discretionary inflation of 3.9% is the largest it has been for over a decade but when everything settles down, hopefully by the end of 2023, the gap will close and the inflation rate will be back inside the acceptable 2 – 3% range. Interest rates will be above their 50-year lows but not at a level that is going to affect affordability and participation in home ownership.
Over the next 18 months two events will occur that will impact on the residential housing market. The first is the decrease in the qualification age from 65 to 60 of downsizing Baby Boomers, applicable from the 1st of July, (and not before). This means a 5-year cohort of retiring baby boomers can capitalise on the high property prices and contribute from the sale up to $300,000 per spouse into their Super Fund as a non-contributary item. The price gap between the family home and the downsized apartment will diminish significantly from hereon due to the imbalance between supply and demand. The supply of family homes will rise (prices fall) as BB’s sell and apartments will be short (prices rise) as BB’s buy. The second event will occur from the middle of 2023 when the massive amount of 2-year fixed interest loans rollover onto higher variable rates. That will soak up a lot of surplus household cash that could otherwise be spent on discretionary items and this is some part meets with the strategy of the Reserve Bank in dampening demand.
Assuming a growth rate of 25% during 2021 for residential property, that 25% is broken up into two parts, 15% being a re-rating of the family home brought on by the Pandemic and 10% due to irrational behaviour of purchasers panicking in a rising market. The 10% will be lost however the 15% will be sustained.
In a world first I will adopt a technical analysis using the Golden Ratios of Fibonacci. These ratios can be applied to calculate levels of retracement in a market when the boom has come to an end. The residential property market in Adelaide commenced its boom in September 2020 with a median price of $441,000. The high point was in February 2022 at $585,000, the gain being $144,000. The first Golden Ratio of 0.236 is applied to that gain, being $33,984 which is then subtracted from the top of the boom price of $585,000 to represent a retracement to $551,016, a fall of 5.8%. The second ratio is at a factor of 0.382 resulting in a retracement of $55,008 or 9.4% from its high and the final ratio is a factor of 0.617 which generates a retracement of $87,900 representing a 15% pullback from the all time high. My reading would be that you can expect the first retracement to apply by the end of 2022, a drop of 5 – 6% and during the course of 2023 the other two retracements would occur with the highest probability of 9.4% fallback, rounded at 10%. If the market continues to reach the ultimate pullback of 15% then the resultant median price of Adelaide homes of $497,250 will still be over 12% higher than at the start of the boom in September 2020.
If the market does pullback by 15% then that will represent a buying opportunity as the economic environment by then would be normalised whilst the competition in the mortgage markets for variable rate lending will always be competitive.
Enjoy your home, enjoy your family and do the best with what you’ve got.
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