Sydney house prices on track for fall 20 pc

This is slowly becoming the consensus economist view, although there are some spruikers who claim that house prices will continue to rise as higher interest rates have no impact on them.

It should also be noted that we are not pre-nature perma bears when it comes to Australian housing. In contrast, we are the most bullish forecasters on Aussie housing in early 2020 when everyone expects prices to fall 10-20 percent.

Household challenges

Australian households are facing a record decline in the value of their largest asset, an owner-occupied home. Wolter Peeters

While the RBA is set to raise interest rates by another 50 basis points in August in response to sluggish inflation data heavily impacted by temporary supply-side shocks, we project that the record collapse in the value of Australia’s most important household asset will ultimately act as a constraint to the extent Martin Place may continue to raise rates. After a pre-emptive over-egging policy despite no evidence of a wage/price spiral, there is a possibility that the RBA will be forced to cut rates in 2023. (Remember the latest CBA data on real-time wage growth shows that it remains very sluggish.)

Australian households face many challenges: the fastest interest rate hikes in a quarter of a century, crushing disposable income; a massive, though expected to be temporary, decline in real wage growth as a result of a one-time rise in inflation caused by a series of supply-side shocks; the record for the greatest decline in the value of their asset, the house the owner occupied; the largest decline in the value of their retirement savings since the GFC; and finally, the specter of fiscal policy dragging on growth as Commonwealth and state governments finally shift their focus to budget improvements and the need to raise taxes.

On this last point, there are some interesting developments. This month Victoria laudably raised $7.9 billion from the partial sale of VicRoads. Treasurer Tim Pallas confirmed that the funds will be used for the state’s new Future Fund that will be used to repay the tens of billions of dollars of COVID-related debt that Victorian taxpayers have accumulated since 2020. This mimics the excellent NSW Debt Pension Fund, which has NSW tapped $11 billion to help pay its COVID-19 debt bill. (We expect NSW to withdraw the remaining $15 billion in due course.)

Following budgets issued by Australia’s five largest states, we know that the official debt issuance task will be $75.6 billion for the 2023 financial year, which is $10.1 billion less than the $85.7 billion the state estimated for FY23 at the time. their FY22 budget. (We had expected the task to be cut materially.)

Demand for liquid assets

If one takes into account the number of rapid issuances that NSW and Victoria are able to make through their record floating rate deal, which has attracted $17 billion bids from banks hungry for high-quality liquid assets, the states’ funding task for FY23 is down from the most recent budget estimate of $75.6 billion to just $64 billion. That is, the five largest states have exactly $10 billion less debt to issue in FY23 compared to their official figures just a month ago. The $64 billion issued in FY23 is also a notable reduction from the $93 billion issued in FY22 and the $98 billion supplied in FY21.

Coupled with modest issuance prospects is the really big demand from liquid asset-hunting banks, which this column has flagged since late 2021. According to our estimates, banks will need to buy between $315 billion and $570 billion of government bonds by December 2024.

This is because they lost $140 billion in liquid assets following the Australian Prudential Regulatory Authority’s decision to close the bank’s profitable Committed Liquidity Facility, which we envisaged last year, and then $188 billion in liquid assets after they paid back the money they borrowed from the RBA under the Term Funding Facility. . Growth in the balance sheet and bond maturity of the RBA balance sheet also boosted additional bank demand for liquid assets.

Our liquidity shortfall estimates are based on banks maintaining their liquidity coverage ratio (LCR) at over 130 percent. UBS arrives with a slightly smaller $275-$375 billion estimate assuming banks can lower their LCR to 125 percent. CBA researchers are showing more hope, claiming that the bank might get away with a 120 percent LCR.

There are two problems with this. Treasurers at major banks ignore the possibility of them lowering board-mandated LCR targets. And APRA recently noted quite clearly that the bank has been carefully keeping their LCR of more than 130 percent in line with global peers.

Despite this overwhelmingly positive supply and demand, states have had to endure huge increases in the cost of financing their debt, which has more than tripled. The first mover was a jump in the yield on Australia’s 10-year Commonwealth bond, which was around 1 percent last year and has since jumped to around 3.5 percent.

True or false, Commonwealth implicitly guaranteed countries borrow by margins above the Commonwealth yield curve and this spread has jumped from 15 basis points last year to around 60-65 basis points in July, generally in line with where the spread the state was trading in the unprecedented financial market shock caused by the pandemic in March 2020.

Directly in the spread

Government bonds are, in fact, the only bonds we know of in the global credit market that trade close to the March 2020 spread level. This is one reason why we like to hold them. For example, the five-year large bank hybrid spread is about 330 basis points above the bank’s bill swap rate. Back in March 2020, the hybrid spread traded as wide as 850 basis points above this.

So what explains the unusual jump in state spreads over the Commonwealth curve? A similarly unusual increase in hedging costs, as indicated by the “swap spread”, has exploded to record levels in the post-centralized clearing period. The main catalyst was the RBA which blew up global investors who believed that Martin Place would fulfill its commitment not to raise interest rates as early as 2024.

The RBA explicitly supports this commitment by setting the 2024 Commonwealth bond interest rate at 0.1 percent, the same level as the cash interest rate target. But in October 2021, it suddenly decided to stop holding on to this “peg,” arguably the most humiliating experience for the central bank since George Soros rolled out the Bank of England in the early 1990s.

As the RBA acknowledged in a recent report, this is undermining its credibility and battered global investors who have allocated capital on the assumption that the RBA’s 2024 yield curve target will remain intact.

There’s been market chatter that has led larger investors up until the last few days to exit long, or accept, positions in the 10-year Aussie swap market, which they have stopped since October last year. This process of halting trades over the past eight months has relentlessly pushed local swap spreads higher, eventually to levels that more than doubled from the previous peak recorded in the post-clearing period.

The good news is that since these flows have disappeared, the spread has started a long process of normalizing back to its fundamental anchor. That anchor is the gap between the bank’s bill swap rate and the RBA’s cash rate, which is about 25 basis points (relative to the current swap spread rate of about 43 basis points). As swap spreads normalize, so do other credit spreads that are affected by them.

More columns by Christopher Joye

• How the RBA cheated Australian households Martin Place risks destroying economic prosperity with some of the world’s most aggressive rate hikes based on forecasts that don’t live up to the paper they’ve written.
• The Aussie housing crash accelerates Australian house prices have declined for the second straight month in June – and the pace of losses picked up sharply and spread to Brisbane and Perth.
• House prices in Australia could fall by more than 30 percent New research shows that house prices could fall by more than 30 percent if the Reserve Bank of Australia meets market interest rate expectations.
• The big house price correction has begun The 15-25 percent correction has begun after house prices fell in May for the first time since the brief decline due to the pandemic that ended in September 2020.
• The great crypto Ponzi scheme finally crashes Bitcoin has lost $US800 billion since its peak last year, with the risk of more losses to come. It’s a world that hinges on the bigger stupid theory: that there are always lesser humans out there willing to buy some worthless crypto from you at a higher price.
• Home prices drop by 25 percent If the RBA relies on its worthless forecasts, be prepared for a really big drop in house prices.
• US recession risks looming late in 2023 This will likely be the first ‘market clean-up’ recession since 1991 when bad companies were literally allowed to fail and superior companies rose to replace them.

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