House prices to fall 15%-25% after the first 100bps of RBA hikes

Christopher Joye

Coolabah Capital

[See a much more detailed update and extension to this analysis here.]

In the AFR today I write that the normalisation of Australian inflation, and the Reserve Bank of Australia’s cash rate with it, is a game changer for everything: equities; bonds; house prices; and portfolio construction. Everyone needs to go back to first principles and re-evaluate their decisioning juxtaposed against a world in which short and long-term interest rates could be a lot higher. Excerpt only (read the full column here):

The existential question is where the RBA and the US Federal Reserve’s so-called “neutral” cash rates lie. Most economists think the local neutral rate is between 2 and 4 per cent. If this is correct, it would mean that the RBA has to raise the cash rate to around 3 per cent to ensure it is neither contractionary nor stimulatory. While we have different views on this internally, my hunch is that the neutral rate is a lot lower than people think, and closer to 1 to 1.5 per cent. It’s ultimately an empirical question: only time will tell.
Even 100 basis points of hikes would have profound consequences for asset pricing. Combined with some out-of-cycle hikes from banks care of normalising funding costs, this would likely force house prices, for example, to correct circa 15 to 25 per cent. In fact, the RBA’s own house price forecasting model, which we have replicated and refined, implies a larger draw-down of circa 33 per cent.
In the decade since the GFC, central banks have been able to pour seemingly infinite amounts of money on all economic problems because there have been no inflationary costs. We’ve long argued that these policies will prove inflationary. And today central banks increasingly face that invidious choice that their predecessors confronted decades ago: do you want higher growth or lower inflation in a climate in which inflation expectations are climbing.  

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 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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