Fifth-largest increase in house prices in 160 years will correct after hikes...

After a massive 20% rally last year - one of the largest on record - Kieran Davies from Coolabah Capital doesn't see a repeat this year. In fact, with a potential 100 basis points in hikes, the falls could be significant. See the data and Coolabah Capital's forecast below. 
Kieran Davies

Coolabah Capital

House prices had a stellar year in 2021, with capital-city prices up over 20% in the fourth quarter from a year earlier, in line with Coolabah's March 2020 projections. Based on the data below, this marked the fifth-largest increase in 160 years, eclipsed only by gains at the end of WW2 when government price controls were lifted, by price appreciation in the early 1970s when inflation started to take off, and by the growth at the end of the 1980s at the culmination of a giant credit boom.

The recent house price increases stand as testament to the success of monetary and fiscal policy in shielding the economy from the pandemic, although, somewhat less positively, they also reflect the longstanding inflexibility of Australia's housing market, whereby government regulations and restrictions mean that demand shocks have an outsized effect on prices rather than the supply of new homes.  

The RBA has often been criticised for not taking high house prices into account when it sets interest rates.  However, such criticism misses the point that easy policy was designed to boost the economy and  asset prices are part of the transmission mechanism of monetary policy.  

Importantly, this means that the RBA will likely fully expect house prices to react (i.e., decline) as it starts to reverse the emergency rate cuts of 2020, particularly when the government has already wound back its fiscal support to households. 

When we replicate and refine the RBA's complex housing market model, developed by Peter Tulip and Trent Saunders, we find that it points to a 33% decline in prices after a permanent 100bps increase in mortgage rates.  

Since October 2021, Coolabah has forecast a 15-25% correction in national house prices after the first 100bp of RBA rate hikes. Most banks are subsequently revised their forecasts to shift to predicting price falls of between 10-15%.

You can view the last 160 years of house price changes in the chart below.

Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...

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