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.  

Access Coolabah's intellectual edge

With the biggest team in investment-grade Australian fixed-income and over $8 billion in FUM, Coolabah Capital Investments publishes unique insights and research on markets and macroeconomics from around the world overlaid leveraging its 16 analysts and 5 portfolio managers. Click the ‘CONTACT’ button below to get in touch.

........
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 www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, EQT Responsible Entity Services Ltd (ACN 101 103 011), 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 Institutional Investments Pty Ltd holds Australian Financial Services Licence No. 482238 and is an authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271. Equity Trustees Ltd that holds Australian Financial Services Licence No. 240975. 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.

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...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.