Aussie house prices fall another >1% in November

Christopher Joye

Coolabah Capital

In the first 28 days of November, Aussie home values have lost another 1% plus based on CoreLogic's 5 capital city index, bringing the cumulative draw-down to 7.7% since the market's May 2022 peak. Note there are a few days left in the month, so the final reported loss is likely to be worse. We expect the total peak-to-trough loss to be between 15-25% (ie, we are more than halfway there).

Sydney prices have fallen by 11.4% followed by Brisbane (-8.0%), Melbourne (-7.2%), Adelaide (-1.2%) and Perth (-0.9%). The strong outperformance of Perth is not surprising given it is one of the cheapest markets on a relative value basis, which is something we have flagged for a long time.

Yesterday we learnt that consumer spending is nose-diving. According to the ABS, retail sales fell 0.2% in October (versus a consensus forecast of +0.5%), which was the first fall since December 2021. Since these were nominal numbers, real or inflation-adjusted spending fell a lot further. The one thing that the RBA has stressed is the risk of any big reduction in household spending, which accounts for half of all economic growth. The canary in the coal mine was house prices, which are getting smashed. Consumer confidence has been running at levels worse than those recorded during the GFC. Now retail spending is collapsing...

As I noted in a piece the other day, about 23% (or almost 1-in-4) home loans in Australia are about to switch from fixed-rate to variable-rate, and will sadly suffer a more-than-doubling of the interest rates that borrowers pay, which will sky-rocket from 1.75-2.25% to 5-6% pa. The RBA estimates that these fixed-rate loans will switch by the end of 2023 and are worth some $500 billion in total, or about one-quarter of the value of home loans outstanding. 

The RBA finds that more than 52% of all borrowers will see their “spare cash” decline by between 20% and more than 100%, assuming its target cash rate climbs to 3.6%, which is notably less than the terminal rate that the market has been pricing. Spare cash is defined by the RBA as the income the borrower has left over after meeting mortgage repayments and “essential living expenses”.

A staggering 15% of all borrowers will have their spare cash turn negative in the RBA’s base case. That means they are at a very serious risk of defaulting on their loan repayments. Almost 1-in-4 borrowers will see their spare cash shrink by between 60% and more than 100%. And around one-third will have their free cash reduced by between 40% and over 100%. 

This will undoubtedly apply a great deal more pressure on the Aussie housing market as we move into 2023. The only hope for borrowers and home owners is that the RBA considers cutting rates at some point next year... 

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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