Housing May Already Be Turning...

Christopher Joye

Coolabah Capital

In my column today I reveal that there are some tentative signs that the Aussie housing market may be already turning with a recovery assured by: an RBA rate cut in June; APRA's decision to slash the minimum interest serviceability rate from circa 7.25% to 6.0%, which we estimate will increase borrowing capacity by 14% to 20% (we forecast APRA would do this on 29 April); the unsurprising election of ScoMo, which eliminates the threat of a 50% increase in CGT and the removal of negative gearing; and the likelihood banks will pass on most if not all the RBA cut(s) (click on that link to read or AFR subs can click here). We predict that national prices should bounce 5-10% in the 12 months following the second RBA rate cut. I also implore my readers to spare a thought for the many fine, brave and well-intentioned souls in the Labor movement that have been devastated by this result and return to our revelation that the RBA is contemplating Aussie quantitative easing (QE), and what this will mean for specific asset prices. Excerpt enclosed:

In April we forecast that the housing correction was likely about to end, and there are now tentative signs that house prices are indeed starting to turn. The hedonic CoreLogic index, which revalues a portfolio of circa 10 million properties each day, indicates that price falls have significantly decelerated, or stopped altogether, in Sydney, Melbourne and Brisbane in May.

If the Reserve Bank of Australia cuts its cash rate twice—with the first likely to come at its June meeting—I expect national house prices will climb at least 5 to 10 per cent over the 12 months following the final move.

On Wednesday the RBA was privately telling bankers that they should pass through 100 per cent of its June cut, and potentially more, given the sharp compression in funding costs. The latter have alleviated partly as a function of the RBA helping push down previously elevated short-term secured (repurchase) and, indirectly, unsecured bank borrowing rates.

My take-away from the RBA’s latest board minutes was that the decision to pause in May was purely about avoiding politicising the central bank by influencing a federal election. The so-called “jobs test” that governor Phil Lowe established following the May meeting—where the jobless rate had to drop materially to stave off a future cut—was not remotely satisfied by the latest data. The modest increase in the unemployment rate from a revised 5.1 per cent to 5.2 per cent was statistically insignificant and driven by a bump in folks looking for work.

This column advocated exercising the option to wait on pragmatic grounds, so kudos to Lowe for delivering. Let there be no doubt, however, that the RBA remains an inflation targeter, although there must be questions over what the right target is.

The potency of the RBA’s June cut will be materially amplified both by ScoMo’s economic agenda and APRA’s decision on Tuesday to slash the minimum interest rate banks use when assessing how much they can lend, which this column predicted on April 29.

Read the full column here.

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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