When the Reserve Bank joined the Federal Reserve and other central banks in slashing interest rates to the lowest levels in history in March 2020, it turned the world of asset prices and finance quite literally upside down.

All of a sudden, bad news became good news for asset prices, as it ensured further central bank and government intervention to prop them up.

The Australian housing market was no exception.

As the images of unemployment lines weaving around the block reached our screens, measures of support were put together by the RBA and the Morrison government, which prevented the worst from happening to the property market.

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Just like that, bad news became good news for property prices, although it wasn't immediately clear to the vast majority of analysts and commentators at the time.

But now, as the labour market improves and truckloads of stimulus does its job supporting the economic recovery, risks are ironically beginning to emerge.

How does employment impact house prices?

In a world where bad news was good news for the property market, too much good news for the economy could be bad news for a roaring housing market.

In recent months the Aussie labour market has consistently shocked analysts and economic commentators with the rapid pace of its recovery.

In October's federal budget, Treasury forecasted that the unemployment rate would still be sitting at around 5.5 per cent in the 2023-2024 financial year.

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As recently as October, Treasury forecasted the jobs market would take a while to recover.
As recently as October, Treasury forecasted the jobs market would take a while to recover.

Yet just five months after that forecast was made, the nation's unemployment rate sits at 5.6 per cent, just 0.5 per cent above its pre-COVID level.

Although the conclusion of JobKeeper and the end of hundreds of billions in government stimulus is yet to be felt, the recovery in the official ABS figures has been impressive to say the least.

After an initial spike in the pandemic, Australia has seen a sharp decline in unemployment.
After an initial spike in the pandemic, Australia has seen a sharp decline in unemployment.

What happens if interest rates go up?

If unemployment were to continue to fall at the same rate as in the most recent ABS labour force report, by mid-year it would sit at just 5 per cent. If the trend were to continue till the end of the year, it would sit at around the level consistent with pressure beginning to build on the RBA to raise interest rates.

Under more normal circumstances this would not only be great news for the economy, but a cause for celebration for a majority of Australians. However, with interest rates at record lows, the inflationary pressures that could result from a strong labour market may prove quite a different story for the nation's highly leveraged mortgage holders.

After more than a decade without the RBA raising interest rates, Australians have become accustomed to rates only going one way, down.

Down, down, down.
Down, down, down.

Forecasts from RBA Governor Philip Lowe that rates won't rise for at least three years has also provided a sense of security for the nation's borrowers which may prove more short lived than intended.

This sooner than anticipated upward pressure on global interest rates has already caused the Bank of Canada (BOC) into a rethink on its own interest rate hike timeline.

Late last year, Bank of Canada Governor Tiff Macklem stated that the BOC was planning on keeping interest rates at their current near-zero level until 2023.

This statement was very similar to those of our own RBA, which has repeatedly stated that rates would not rise for three years.

Yet despite the Bank of Canada's previous viewpoint, a stronger than expected recovery now has them eyeing a rate hike as soon as the second half of next year, as little as 15 months from now.

In this highly uncertain and fast moving environment, the predictions of central banks not to raise interest rates may prove to be just that, words.

Words that may have little concrete meaning when tested by a set of circumstances that central banks like the BOC and the RBA were not expecting.

A 30 per cent rise in house prices

According to research from the RBA, the cash rate being cut by 1 per cent would result in a 30 per cent rise in real housing prices over a three-year period.

While the impact of the 2019 and 2020 rate cuts is arguably yet to have been completely priced into the housing market, with the RBA cash rate at an all-time low of 0.1 per cent, there is no more ammunition left with which to support housing prices in the future.

After 51 RBA rate cuts over the past 31 years, there is a growing consensus among economists that the only way for interest rates to go is up.

This raises a very uncomfortable question for many Aussie mortgage holders, particularly those who stretched their budgets to get into the market recently - what if the RBA raises rates sooner?

If rate hikes do come earlier than RBA Governor Philip Lowe predicted, a further downside scenario is raised.

If a 1 per cent cut in the cash rate results in a 30 per cent rise in real housing prices over three years, what would a 1 per cent rise in the cash rate do to property prices?

As the impact of the Morrison government's various stimulus programs and JobKeeper begins to fade, we may see the rapid labour market recovery stall or even reverse, particularly if the global economy falters once more.

If the labour market manages to shrug off these headwinds and recover at a rapid rate, we may see the Lucky Country dodging the worst of yet another global economic crisis.

Ultimately, if Australia does see a permanent shift toward a more inflationary future defined by multiple interest rate hikes, it may ironically leave some highly leveraged mortgage holders pining for the days of interest rates at emergency lows and a stagnating economy.


Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator




Originally published as Disaster looming in Aussie housing market

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