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

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.


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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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