31 March 2020
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Could a 1% fall in interest rates trump property price doomsday merchants?

Peter Switzer
29 April 2019

With some really odd Australians seemingly praying for a house price Armageddon, some experts are pondering whether a bottom is starting to show up in the property market. It comes as the AFR’s Chris Joye says RBA analysis suggests a 1% cut in interest rates would turn a slump in prices into a rebound.

This is what he told us late last week: “The RBA’s own internal research estimates that a 1 percentage point reduction in the cash rate would boost house prices by 28 per cent, assuming it is fully passed on by banks (and borrowers consider the change permanent).”

While that’s interesting, I can’t see a rate cut of that proportion coming but a lot of economists are tipping half-a-percent cut in two 25-basis point drops, starting in July this year.

On Chris’s numbers we might expect at least a 10% rebound, which might be enough to shake the negativity out of those showing up to auctions and open houses.

Chris isn’t alone thinking rate cuts could create a circuit-breaker to slow down or even stop the house price fall. AMP Capital’s chief economist Shane Oliver thinks an early rate cut could put in the stuff that creates a trough or bottom for house prices.

This comes as auction clearance rates are on the improve and signs of buyers starting to react to lower prices are giving optimists reason to believe that the big price legs down might be behind us. Only time will tell. Shane thinks rate cuts could speed up the end of price falls.

“An early rate cut does, I think, raise the possibility that the bottom of the cycle will come earlier,” he said. “Historically, if you look at the last two cycles, the 2008 GFC-related slump and subsequent recovery and the 2011-12 slump in house prices and the subsequent recovery, house prices nationwide – and also in Sydney and Melbourne – started to rise four or five months after the first interest rate cut.”

We’ll see the latest house price data on Wednesday and the AFR says early signs suggest the rate of fall for prices is easing.

“While Sydney home values shed 0.9 per cent in March and Melbourne lost 0.8 per cent, CoreLogic figures for April due out on Wednesday are likely to show an easing,” the AFR’s Michael Bleby pointed out. “The data provider's monthly index for the first 28 days of April show a lesser 0.6 per cent decline in the NSW capital and 0.5 per cent south of the Hume Highway in Melbourne.”

If we see a price rebound with the black cloud of the election hanging over us, it would be a pretty good effort. And that goes double with Bill Shorten having a number of big plans for the property sector, if he makes PM on May 18. Bill’s changes to negative gearing and the capital gains tax discount reduction from 50% to 25% could chase a lot of investors out of the market and should result in lower prices, so January 1 could produce another leg down for house prices that could get the doomsday merchants celebrating! Do these people know what being happy and celebrating is all about? I guess they like it when people who made capital gain, start losing that gain.

However, ahead of a potential problem for real estate prices after January 1, Bill’s pending election property plays and changes to the capital gains tax discount could lead to a mini-boom for property, stocks and any asset that gains value and eventually attracts a tax for being lucky!

Why? Advisors, accountants and other smarties will tell their clients that assets bought before January 1 will give a 50% capital gains discount, while after that date the discount drops to 25%. If I bought an investment property 10 years ago for $500,000 and sell it for $1 million, I would pay capital gains tax on $250,000 (half of $500,000) under the current situation. But under Bill Shorten, if I bought a place on January 1 for $500,000 and later sold it for $1 million, I pay capital gains tax on three quarters of $500,000 (or $375,000). That’s a big win for the tax man and a big loss to those Aussies who invest in property, shares, art, collectibles, etc.

My biggest concern would be if our economy turns down later this year rather than it bouncing back, as many economists expect. If we have a slowing economy, made worse by Bill’s new negative gearing rules and taxes, then my doomsday merchant mates might get their wish to see their 40% price slump become a reality.

This isn’t what I’m expecting, neither is any “establishment economist”, as the doomsdayers like to insultingly call well-trained, high-achieving professionals, for reasons that escape me.

The best case for the worst case scenario on house prices would be a serious US recession leading to a stock market crash, that produces a local recession, with unemployment over 8%. People losing jobs could be a shocking input to a housing market weakened by tougher APRA regulations, stricter bank lending criteria (thanks to the Royal Commission), Bill’s property tax changes and the natural nature of housing markets where prices always have to fall after a boom.

If Labor is destined to win the May 18 poll, I really hope Bill and his numbers man, Chris Bowen, are smart enough not to help a 40% fall in house prices for three reasons.

One, I’d hate to see a serious recession, where people lose jobs and businesses go bust.

Second, I’d hate to see what would happen to the Budget, which is currently heading towards surplus.

And third, I’d hate to see those smug bastards who rudely criticise “establishment” economists as being short-sighted, influenced by their employers and dumb, end up being right!

To date, I haven’t engaged in name calling and insults with Twitter keyboard warriors, who think themselves property price experts, because I’ve always learnt stuff by engaging in debate with smarter people. Steve Keen and I never insulted each other, though we disagreed about house prices after the GFC. But Steve actually is smart and not insecure, even if he got it wrong.

The Twitter doomsday merchants rudeness and insults in this property debate don’t make them deserving of actually being right. This might be a great test of that question: “Is there a God in heaven?”

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