Australia’s decades-long housing boom is over with higher interest rates here to stay, warns a former Reserve Bank of Australia insider.
Challenger chief economist Jonathan Kearns, who was head of the RBA’s domestic markets department until 2023, says higher interest rates, rather than recent changes to tax concessions in the federal budget, are to blame for the national downturn in house prices.
“The decline is almost entirely a result of the increase in interest rates, with changes to negative gearing and capital gains tax concessions only having a limited effect,” Kearns has told a property sector breakfast hosted by Herron Todd White in Brisbane.
He says there is unlikely to be a return to the ultra-low interest rates experienced during and after the COVID-19 pandemic.
While the current cash rate is at a 15-year high of 4.6 per cent, it could hover between 3.5 and 4 per cent over the long term, Kearns adds.
“We should get used to interest rates being higher,” he says. “Perhaps they will not be as high as they are at the moment, but they will certainly not go back to the levels we saw during the pandemic or even before.
“Those interest rates of one and two per cent were exceptional.
“Don’t think of those as normal. Interest rates of around five per cent are probably more reasonable and more normal.”
Kearns says inflation remains stubbornly high in Australia and that another RBA rate rise on Melbourne Cup Day is “almost certain”.
“Inflation is still a persistent problem in Australia, and that’s driving monetary policy,” he says. “Monetary policy is working. It is doing its job, but it’s just taking time.
“The RBA will have to hike on Melbourne Cup Day, delivering a rate rise that will stop the nation, but hopefully not the economy,”
Kearns says national housing prices have already fallen by more than 5 per cent and he expects further declines.
“They’re not done yet; they’ll fall further,” he says. “My guess is probably about 10 per cent, although various people are saying up to 15 per cent.”
Kearns says Australia is unlikely to return to the 10 per cent annualised house price growth seen in earlier decades, when the housing price boom had been boosted by low inflation, lower interest rates, financial deregulation and easier access to credit.
“Those forces allowed people to borrow much more and pushed prices substantially higher,” he says.
Because underlying growth will be slower, downturns will become more noticeable. Over the long term, he says “this is likely to be the largest decline in national housing prices since the Great Depression “.
When average growth falls from around 10 per cent to perhaps 5 or 6 per cent, Kearns says even a modest slowdown can push prices into negative territory.
“The Australian economy is at a fragile juncture,” he says. “The conflict in the Middle East drags on, with the oil price more sensitive to shocks. For now, the AI boom is powering the global economy, but we must ask, how long can those trends last?”
Herron Todd White chief economist Cameron Kusher says interest rates are going to have to “stay higher for longer” to get inflation under control.
“The RBA’s got one thing it can pull, and that’s the interest-rate lever,” Kusher says.
He argues the central bank risks losing credibility if it does not keep a strong focus on inflation, and says government spending is making the inflation fight harder.
The housing market is unlikely to recover until late next year or early 2028, he adds.
Kusher says the housing downturn is widening. Brisbane’s housing market, for example, has shifted dramatically following a prolonged period of extraordinary growth.
“Brisbane has gone from being one of Australia’s strongest property markets to one of its weakest in a remarkably short period,” he says.
“Values have fallen 4.7 per cent in just three months, sales volumes have recorded the largest annual decline of any capital city or rest-of-state market, and vendors are being forced to offer increasingly substantial discounts to secure a sale.
“At precisely the time Australia needs to build more homes, falling established property values and rising construction costs are making new developments increasingly difficult to justify financially.”
Glen Norris is an experienced journalist and editor with a career spanning four decades across Asia, Australia and Europe. His roles have included stints at Bloomberg News and Asian Wall Street Journal.
Extra shifts, Aldi shopping, staycations: Life inside Australia’s mortgage squeeze
Rising interest rates are forcing Aussies to work longer hours, cut luxuries and sacrifice family time and holidays as mortgage repayments climb.
Australia’s steepest quarterly housing decline on record: capitals see up to $89,000 wiped off prices in 3 months
Australia's housing downturn is being felt nationwide, with every capital city recording house price falls in the September quarter for just the second time on record, wiping as much as $89,000 from median values in some markets.
RBA leaves door open to more rate hikes as house prices slide
The RBA has left the door open to further interest rate hikes despite acknowledging higher borrowing costs are contributing to a sharper-than-expected fall in house prices.
The information on this website is intended to be of a general nature only and doesn't consider your objectives, financial situation or needs.
