Sydney's rate of house price growth ought to slow

Sydney's rate of house price growth ought to slow
Sydney's rate of house price growth ought to slow

This year has seen continued upwards pressure on Sydney house prices, but standby for a shift.

Yes there's still near-record low interest rates, reduced stock levels, strong population growth, as well as a renewed rush from investors to use negative gearing to set up for retirement.

But the slightly higher interest rates announced by lenders recently - or more likely the obvious prospect of continued out of cycle rate rises - ought act as a break on the exuberance on display on Saturday's across Sydney this year.

The double digit price growth cycle - which has just hit 18.9 percent according to CoreLogic - needs to come to an end.

It doesn't mean prices will head backwards or crash, rather the rate of growth ought slow. 

This week there was analysis that mortgage rates would need to rise to around six per cent before house prices nationally start sliding.

That's highly unlikely, but a slow down in price growth is around the corner - and what almost everyone wants.

Just when it all takes place is the big question as certainly the 80 per cent plus weekend clearance rates haven't faltered this autumn.

Perhaps higher stock levels heading into Easter will provide a trigger mid-next month. Then the actual holiday pause could lay the platform for wiser heads at auction.

Earlier this month it was suggested that just three rate hikes of 25 basis points by the RBA would deliver a bigger increase in debt-servicing costs for households than 10-11 rate hikes did in the mid-1990s

According to Macquarie Bank’s head of economic research, James McIntyre current households' debt levels are at a record 187 percent of income and a one percentage point increase in the RBA's cash rate would, excluding further increases in lenders' borrowing rates, push the household debt servicing ratio beyond 10 per cent.

While household debt serviceability is currently manageable given the record low rates, the risk is ripe for when when they increase given record high household debt.

McIntyre studied previous tightening cycles, some which involved 11 quarter-point hikes.

"We estimate that three to four 25 basis-point rate hikes would deliver a bigger increase in debt-servicing costs for households than 10 to 11 rate hikes did in the mid-1990s," he told clients. 

"The RBA's reticence about further increases in household debt-to-income ratios is clear when you begin to consider how potent interest-rate rises might be from a debt-servicing perspective,'' McIntyre said.

He noted a big difference between the periods is a wider spread between the cash rate and lenders' mortgage rates: from 180 basis points to about 375 basis points, expanding since the GFC supposedly due to rising bank funding costs.

McIntyre, however, doesn't expect a formal RBA rate increase until early 2019.

This article first appeared in the Daily Telegraph.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of our authors. Jonathan has been writing about property since the early 1980s and is editor-at-large of Property Observer.

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House Prices Sydney Market

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