Interest rate hikes pointless in face of disastrous lack of housing

There are nuances to what constitutes non-discretionary. Food is the example often cited. But while I may love smoked salmon, I can sustain myself nutritionally without it. I have that choice. If I deem it’s too expensive, I can walk away.

Shelter - a roof over our head - is also typically considered non-discretionary. The key difference is that given the current lack of supply for owner-occupiers and renters, the choice to walk away is unavailable to most. A tenant unwilling to pay a certain rent may find they’re left with no choice at all.

So, for the non-discretionary category of housing, it’s the case that consumers have to pay higher prices. The luxury of choice does not exist. Thus, we’re left with a cycle of inflationary pressure.

Next week the Reserve Bank (RBA) Board meets again. High prices for energy, petrol (the impact of multiple wars being felt) and yes, housing, have pushed inflation to an uncomfortably high level.

Should the RBA respond with another rate hike, the lack of choice owner-occupiers and renters face in paying for the roof over their head will be reinforced, as they necessarily have to cough up more. And the cycle of inflation will power on, leaving the RBA in a similar predicament next month.

The only circuit-breaker to this cycle is a large-scale supply response.

Property prices march on

In a balanced market, 12 interest rate increases would be expected to dampen prices. The fact house values keep rising underlines the supply crisis.

CoreLogic figures show dwelling values rose 10.9 per cent over the first 10 months of the year in Sydney. Regional markets can lag the capital cities but the trend holds, as prices in regional New South Wales were up 0.6 per cent in October.

While there are signs the pace of price growth may temper, with a slight uptick in advertised stock levels in spring and ongoing affordability pressures, the market has demonstrated its resilience once again.

From Covid to stock market volatility and rising interest rates, there have been numerous factors that a series of doomsayers have latched onto in recent years to predict a major correction in the residential housing market.

In every instance they’ve been proven wrong because the most influential factor in house prices is supply and demand. Month after month passes, more big picture housing plans are revealed, more politicians talk tough on countering NIMBY forces, and nothing changes on the ground.

New projects are taking way too long to be approved and built, and current economic conditions are making developers wary. They need pre-commitments from buyers (and co-operation from councils) to proceed and, unfortunately, for investors there’s not much incentive to invest in a new property at the moment.

Or an existing property, for that matter. Nationally, according to CoreLogic, gross rental yields appear to have peaked as values have risen. Increased repayments and maintenance costs have seen gross yields trend down to 3.69 per cent in October. For comparison, many term deposit rates at the moment start with a 4.

In this truly non-discretionary context, there’s nothing on the horizon that suggests any major change to the trajectory of house prices, rents, rental yields, transactions or otherwise in the real estate market.

The cycle of upward inflationary pressure will most likely power on and mortgage holders can only hope prices in discretionary categories ease to a point that gives the RBA some breathing room.

And collectively, we can only hope more homes can be built quickly so everyone can have a roof over their head.