John Lindeman, Author at Lindeman Reports

Posted on October 21, 2024October 21, 2024 by John Lindeman

Knowing the right time to sell

All property market booms eventually end, and so investors need to know when the time to consider selling has arrived. Property market expert, John Lindeman, explains which indicators reveal the right time to sell.

Property market analysts rely on many different indicators to look into the future and predict whether prices are likely to rise or fall. Some proudly advertise that they employ up to twenty five housing market fundamentals to make their forecasts, while others seem to rely only on gut feel, hearsay or intuition.

Here are the three most commonly used indicators, and John’s assessment of their usefulness to property owners.

Sale prices reveal past performance

Sale prices are obvious indicators of a market’s performance. If prices are falling, it’s time to get out, some experts tell you. But the issue with published sale prices is that they are not predicting the future, only revealing the past.

This table shows you the huge price growth that has occurred in four of the most affordable Perth suburbs over the last two years, and that the rate of growth actually increased in the last twelve months to October 2024.

Followers of strong past performance would have us believe that this price growth acceleration is a good indication of more growth to come.

Others will assure us that such high growth rates are unsustainable, and that the turning point could arrive at any time. The issue for investors is that we can’t tell from past performance whether more growth is on its way, or whether the market has reached its turning point and it’s time to sell.

The number of sales shows us changes in demand

It’s much more useful to look at the actual trend in the number of sales rather than past sale prices.

This is because decreasing sales indicate that buyer demand is slowing down and are a sign that prices could soon be following.

This table shows that the number of sales in the same four Perth suburbs over the three months to October 2034 has been declining.

While this may give property owners in those suburbs cause to think about selling, the problem is that sales alone do not provide a full picture because, like sale prices, they are based on past results. To look into the future we need to know potential buyer and seller intentions, which are indicated by changes in the number of listings.

The number of listings reveals changes in both demand and supply

If the number of houses or units listed for sale in a suburb increases, it tells us that buyer demand is falling or that more owners want to sell, or that both are occurring at the same time.

In those four Perth suburbs, we can see in this table that the number of properties listed in the last three months is rising.

The number of listings is called a leading indicator, because it points the way ahead. While the number of houses sold has been falling, the number of owners trying to sell by listing their houses on the market has been growing. If these trends continue, they could reach the turning point where prices will start to fall.

You can check the sales and listings trends for houses or units in any selected suburb to see which way they are moving. This will give you a much better indication of potential price changes than relying on past price performance.

Posted on September 16, 2024September 16, 2024 by John Lindeman

When the cure kills the patient

When germs attack our bodies, our immune system quickly goes into action to repel or destroy the invaders. And if all else fails, it raises our body temperature until the enemy has been destroyed. It’s very similar to how the RBA is fighting the disease of inflation with high interest rates.

Using higher temperatures to fight disease is a risky strategy, because there can only be one winner – either the disease is killed, or we die. In the same way, the RBA runs a risk that higher interest rates will kill the economy before inflation is brought down.

In fact, there is mounting evidence high interest rates are stifling the economy, with the latest ABS figures showing that our economy grew by just 0.2% in the June Quarter. The only reason that we are not already in recession is because of the huge numbers of overseas arrivals who are fuelling buyer demand. Put simply, each of us is spending less, but because more people are spending, our economy is still in growth. These migrants do, however, also create more demand for housing.

The rental shortage in inner urban areas is getting worse

New arrivals (at least initially) are nearly all renters, and because they prefer to rent in the high density inner urban areas of our major cities, asking rents and rental yields in those locations are shooting up.

This table shows you some of these locations in Sydney, Melbourne, Adelaide and Perth, where current rental yields for units are over six percent, despite unit rents rising by more than ten percent per annum.

Cutting back overseas arrival numbers is not the solution

While we need overseas arrivals to keep the economy in growth, the downside is that they are directly responsible for the rapid rise in inner urban unit rents. This could motivate the Federal Government to address the housing shortage and escalating asking rents by cutting the intake of overseas migrants. This would be a terrible miscalculation as it would guarantee a quick economic slide into recession.

Instead of trying to kill the economy, the RBA should be caring for the economy

Our current inflation rate is a direct result of the massive borrowing and money printing programs that the government embarked on during the pandemic years to keep the economy afloat. While there is no doubt that this was necessary at the time, it was always going to result in inflation. Over time, the rate of inflation will keep falling as the impact of all that money pumped into the economy dissipates.

There is, however, a proven link between interest rates and economic growth as this graph shows.

Every period of higher than usual interest rates has resulted in economic slowdowns (1975, 1996, 2008) or in recessions (1982, 1990).

The data for the last two years shows that we are heading for an economic recession.

Lower interest rates are the only solution

There is simply no need for the RBA to try and speed up the process of lowering inflation with a “kill or cure” strategy. As the data shows, it’s high time that the RBA turned its attention instead to caring for the economy by reducing interest rates.

Lower rates will not only encourage economic growth, they will turn housing into a more viable option for both investors and developers. This will increase the supply of rental stock and new housing and reduce the upward pressure on rents.

Posted on August 30, 2024August 30, 2024 by John Lindeman

The seasonality myth busted

As each spring approaches, so do those blogs and click baits assuring us that spring is the “selling season”. John Lindeman busts this urban myth wide open, explaining that it’s actually the best time to buy.

Potential sellers are often told that spring is the best time to sell their property and at first, this seems a no brainer.

The weather is warming up, gardens look their flowering best and buyers are returning to the property market in droves after hibernating during the long cold winter.

Sellers are also frequently warned that summer is not a good time to sell, because many prospective buyers are on holiday and not concerned about buying property.

Winter is even worse, they’re told, because the cold and wet weather deters all but the most enthusiastic buyers.

There are fewer listings in summer and more in spring

These perceptions have a definite effect on seller behaviour because they encourage fewer vendors to list their properties for sale in summer or winter, believing that their homes will take longer to sell and bring in lower prices because there will be fewer potential buyers in the market.

They also motivate more potential sellers to list their properties for sale in the spring “selling season” because they think that there will be more buyers competing in the market.

They believe that their properties are likely to sell more quickly in spring and for higher prices.

So, all else being equal, you can see that this thinking results in there being fewer properties listed for sale in summer and winter, and more properties on the market in spring and autumn. It is all based on the notion there will be fewer potential buyers in summer and winter and more in spring and autumn. So, is this really what happens?

Australia doesn’t have huge seasonal climate differences

The first issue is that the idea of “seasonality” originated in the northern hemisphere, where the weather changes dramatically with the seasons. That’s not the case in Australia – our winters are relatively mild and in cities with temperate or tropical climates, winter is a good time to go house hunting while spring is already sometimes too hot.

Even in our colder winter cities such as Canberra, Hobart or Melbourne, fans flock in their thousands to watch football games and the weather is seldom harsh enough to keep people indoors for long. The seasons don’t affect buyer behaviour as they might in other countries, but there’s a far more important reason why buyer numbers don’t change.

Buyer numbers don’t change by the seasons

The way in which we search for properties has dramatically changed in recent years and now has little to do with the changing seasons.

Virtually all potential buyers no longer do their initial research by travelling from one real estate agent to the next or going on physical inspections, but by visiting on-line listing sites.

They do this all year round, whether it’s raining, snowing or sunny and from the comfort of their homes, at work or while on holidays.

They take virtual tours of a property, including all the rooms and even the surroundings, organise video walkthroughs of each room with the agent, take a virtual walk down the street with Street View and check out the local area with Google Earth.

As far as residential property buying goes, the internet has been a game changer and is the main reason that buyer searches are no longer seasonal in the way that they may have been many years ago. The idea that “spring is the best time to sell” has become an urban myth, and no longer has any connection with reality.

In short, there is no overall seasonal change in buyer demand patterns and the days when buyer demand rose in spring, or real estate agents were able to lock up their offices and go on summer holidays are long gone.

Yet the persistence of the seasonality myth encourages more vendors to try and sell in spring, and fewer to list properties in summer and winter. This has the exact opposite effect of what they think will happen.

Seasonality as perceived by potential sellers

This picture shows you how potential sellers are told that there are more buyers out there in spring and fewer in other seasons, especially during summer and winter. They believe that by listing their properties in spring or autumn they will sell quickly and for the best price, because there are more potential buyers looking for properties.

This encourages more potential sellers to list in spring and fewer in summer

As a result of the seasonality myth, more potential sellers list properties for sale in spring, fewer in autumn, and even fewer again in summer and winter. This would be fine if the numbers of potential buyers followed the same seasonal pattern, but as we have seen, the numbers of potential buyers don’t change with the seasons.

This picture illustrates what actually takes place in the property market during each season. The numbers of buyers remain steady all year, but the numbers of listed properties rise in spring and fall in summer and winter.

Of course, there are many other dynamics that can move property market prices during the course of a year, such as interest rate changes and population growth or decline. When these are taken out of the equation, seasonality itself has no impact, but the seasonality myth certainly does.

This means that spring is the best time to buy a property because there are more listings and vendors are competing for buyers, while summer or winter are the best times to sell because there are fewer listings and potential buyers are competing for properties.

Posted on March 27, 2024June 4, 2024 by John Lindeman

When will interest rates fall

When will interst rates fall?

The Reserve Bank is responsible for maintaining monetary policy which encourages both economic growth and low unemployment while keeping inflation under control.

The RBA uses three key performance indicators to measure economic health:

The quarterly Gross Domestic Product (GDP) should show that our economy remains in growth.
The unemployment rate should stay below 4.5%.
Inflation must remain within a bandwidth of 2% to 3% over the business cycle.

To measure inflation, the RBA uses the Consumer Price Index (CPI) which is a basket of common goods and services. Any changes in the total cost of the basket indicate the rate of inflation.

The RBA does not take house prices and rents into consideration

Previous RBA Governors such as Glenn Stevens and Philip Lowe have publicly stated their concerns and even “discomfort” whenever housing prices have boomed, but they have never used interest rates to boost or slow down housing prices. Instead, they have argued that such concerns need to be weighed up against the need to regulate economic activity.

They have pointed the finger at how land and housing are taxed and the choices that our society and politicians have made that lead to high urban housing costs. In other words, the RBA believes that housing shortages and rising prices are political and social issues, but not monetary ones.

The RBA only considers housing prices and rents in terms of their inflationary impact, and housing prices and rents are already included in the CPI basket.

What prompts the RBA to change interest rates

Because the RBA relies on all three key indicators (economic performance, unemployment and inflation) together, movements in any one of these will not necessarily be reflected in interest rate changes.

This chart shows that since 1959, home loan interest rates have generally been higher than the rate of inflation – but not always, and the difference has varied considerably over time.

The reason that the correlation has not been close is because the RBA reacts to changes to the unemployment rate and our economic performance as well to the inflation rate.

The RBA acts when two of the three key indicators change

This does not mean that the RBA waits to act until all three indicators are moving the wrong way. The RBA has used interest rates to fix things when any two of the three indicators start to go south, as shown in this table.

For example, at the start of the pandemic in 2020, the economy was about to slow and unemployment was expected to grow, so the RBA cut interest rates to record lows.

By 2022, however, inflation was rising and unemployment falling, so the RBA weighed in with a record number of rate rises.

Will interest rates fall sooner rather than later?

The three key indicators reveal which way the RBA is likely to act in the near future, but although inflation is falling, the rate is still above the RBA’s target of 2% to 3%, and the unemployment rate is still well below the RBA’s target maximum of 4.5%.

This means that it would require a massive fall in inflation with a simultaneous lift in unemployment in the next few months to motivate the RBA to cut interest rates.

However, there’s a third indicator, which is economic performance. The GDP figures for the December quarter showed that our economy is flatlining, so the RBA will be watching the next GDP figures due to be released on 5^th June. If the economy is found to be contracting, it would only take a fall in inflation OR a rise in unemployment to motivate the RBA to lower rates.

Posted on August 19, 2023August 20, 2023 by John Lindeman

Artificial intelligence and the property market

Artificial intelligence is finding its way into almost every facet of our lives. John Lindeman investigates its potential role in property market analysis and prediction.

The main purpose of artificial intelligence (AI) is to develop computer systems which are able to perform decision making tasks normally made by humans. As far as property investors are concerned, the best AI systems should reveal where we can buy for the strongest future growth or cash flow, what type of property will deliver the best results, and when the right time to sell has arrived.

There are hundreds of indicators, stats and numbers to choose from

The issue for the developers of such AI systems is determining which of the huge number of indicators and stats that are routinely quoted and relied on by property market commentators to make use of. Here are some of them:

The AI analysts and programmers have to decide which of those numbers simply don’t work, which ones do and what these numbers are actually telling us about the property market. Then they need to develop working artificial intelligence algorithms using them to make predictions. This means that the data must be recorded and checked against actual performance over long periods of time so that meaningful conclusions can be made.

Stats can be limited or general, and also short or long term

Stats which rely on current trends such as sales and listings can only estimate imminent price or rent changes, while others, such as migration and unemployment rates have a longer time window. The issue is further complicated because some stats have an effect on entire markets, while others only measure local changes.

Some stats such as interest rates and consumer confidence are called “top down” indicators because they can change buying and selling trends for whole cities or even the entire country.

Other stats, which are “bottom up” indicators such as sales and listings can be used to measure potential performance in individual suburbs.

Many experts retreat to the safety of the property market cycle

If you’re confused by all this, you are certainly not alone. Many strategists and theorists throw their hands up and claim that we can’t accurately predict future property market performance at all. They retreat to the assumed safety of relying on past performance, or the property market cycle and the property clock.

Whether artificial intelligence can make useful property market predictions does not depend entirely on what data is used and whether the predictive algorithms are accurate. The main stumbling block is that artificial intelligence can only predict where, when and what, but can’t reveal why.

Knowing the reason why changes occur is often the key to understanding the future performance of any property market. Why is buyer demand for certain types of property increasing? Why is the rental demand falling?

Even the best tested predictive algorithms and methodologies will always need to be confirmed by conducting thorough on the ground research and getting answers to the question “Why?”

Posted on June 9, 2023June 9, 2023 by John Lindeman

The truth about housing market cycles

One expert solemnly warns us about the perils of trying to time the market while another eagerly assures us that the turning point has arrived and it’s time to buy. They can’t both be right, so can we time the market or not?

Human beings hate uncertainty. It fills us with anxiety and worry, so it’s little wonder that many investors rely on indicators that tell us which way property markets are heading.

One of the most popular timing devices is the property market cycle, or property clock. We are often told about which stage of the housing market cycle we are in, or where the property clock is pointing. These tools are seen as being useful for property investors and owners because they appear to give us some certainty about the future.

They claim to predict housing price changes, but have you noticed that there’s so many of them? Property clocks range from four, six, eight, twelve or even eighteen years, and housing market cycles cover suburbs, regions, cities or the entire market. It’s no wonder they point in different directions at the same time.

The reason that these tools are inaccurate is because they operate on the flawed assumption that housing markets always move in regular and predictable cycles and in accordance with immutable laws. The problem with this is that they can’t anticipate significant but unexpected shifts in the causes of housing price changes.

Recent major economic, fiscal and social events were completely unexpected

Yet this is exactly what has occurred in the last few years. We experienced a massive pandemic, which led to unprecedented government responses such as lockdowns and border closures. We are now faced with rates of inflation not seen since the eighties, with many records being broken, such as record low unemployment, record high overseas arrivals, record low rental vacancy rates and a record number of interest rate hikes.

There is simply no way that the housing market cycle or property clock could have anticipated these significant housing demand dynamics when even the most respected and revered economists, analysts and experts failed to do so.

Failing to take unexpected changes into account leads to incorrect forecasts

This is not to say that we can’t predict the future of housing prices or time the market, but it does mean that we need to take those major changes into account when we do.

The main dynamics of property markets are population growth and movement, purchasing power and whether there’s a shortage or surplus of available properties.

Those dynamics dictate which way prices and rents will move, so we need to forget about which stage of the cycle we are about to enter, because right now, the property clock and the housing market cycle haven’t got a clue.

Posted on May 1, 2023May 1, 2023 by John Lindeman

The slingshot effect

As a property market analyst, I’m always looking for tips and tricks that can help investors find areas with growth potential before the growth actually occurs. So what if I told you that there’s a way to easily find areas that have growth potential even while prices are falling? Well there is, and it’s called the slingshot effect.

Have you noticed that when you fire a slingshot, you have to pull the payload down so that it will shoot up?

The same thing takes place in property markets when growth is about to return, because astute buyers move in and buy up the low priced bargains first, which actually pulls prices down until the cheapies are all gone.

The median price measures the middle point of all sales, so even if sales are rising, the median sale price starts to fall because the bargains get snapped up first.

This table shows you how the median (in blue) is hiding the fact that buyer demand is actually growing and prices will soon rise.

Prices start to shoot up, like a slingshot being fired, once all the cheaper listings are gone. Buyers now must compete for dearer properties, and growth quickly returns.

The slingshot effect happens whenever market conditions change, motivating potential buyers to act after many months or even years of stagnation or price falls. It occurs purely because the bargain properties get sold first, so that median prices can’t rise until they are all gone.

This graph illustrates how the slingshot effect works, showing that it took many months after interest rates dropped in 2020 before house prices boomed in 2021.

Even though the number of buyers rapidly grew during 2020, there were sufficient stocks of properties for sale to soak up the demand, and there was no significant rise in prices. By late 2020, however, the turning point was reached as the number of aspiring home buyers outpaced the number properties listed for sale and as all the cheapies were gone, prices suddenly boomed.

This time around exactly the same dynamics will unfold and clever investors can use the slingshot effect to find bargains in suburbs just before prices shoot upwards. Watch for locations where the median house price has been falling, but sales are trending up and the number of properties listed for sale is steadily declining.

For example, the median house price in the inner Brisbane suburb of Rocklea has fallen by around $100,000 since last October, but the number of sales has doubled over the same time. This doesn’t make any sense, unless you realise that it’s the slingshot effect at work, and once all the cheapies are gone, prices will boom.

To confirm that this is happening, we can see that the number of listings in Rocklea has nearly halved since last October, and that there are very few low-priced bargains left for sale. It’s only a matter of months before prices soar again.

That’s how the slingshot effect works. It enables savvy buyers to snap up bargains from vendors who are unaware that the market has changed.

Posted on April 24, 2023April 24, 2023 by John Lindeman

The sleepers set to boom

Many locations in Australia are heading for what could be their biggest property market boom ever. John Lindeman explains why this is about to occur and which of the sleepers are set to boom.

Did you know that we have only ever experienced six housing market booms since our nation began? They are shown on this graph, and they were all generational property market booms, beginning when each new generation decided to buy their first homes at the same time.

All our property market booms have been generational

You can clearly see the Federation boom in the early 1900s, the two post-war baby booms of 1919-1922 and 1947-1951, the baby boomers buying their first homes in the 1970s, the Gen X buying boom in the early 2000s and more recently, the Millennial home buying boom which started during the Covid years.

When housing booms, so does our economy

What’s even more significant for investors is that each of these housing market booms has created economic booms. This is because housing demand directly stimulates the financial, construction and business sectors, and indirectly generates around one quarter of our economic growth.

When the economy booms, so does migration

Because of our relative isolation, Australia has been able to avoid the direct impact of wars, social unrest, economic crises and other disasters experienced in other parts of the world. When such catastrophes occur elsewhere, we are seen as a peaceful and prosperous safe haven and huge numbers of migrants and refuges decide to start new lives here.

As the graph shows we are once again receiving record numbers of permanent overseas arrivals from economically and socially troubled parts of the world and this trend is likely to increase over the next few years.

These new arrivals not only generate more demand for housing, they also stimulate our economy by creating new business enterprises. There has always been a strong connection between migration, economic growth and housing market booms, but the third graph shows that we have yet to reach this point, because our international borders have only been open for a relatively short time.

Housing prices can double in a few years

In every one of the five property market booms that Australia has experienced before the last boom, housing prices more than doubled in just a few years. So all the conditions for another boom are in place – we have just experienced the Millennial home buying surge and are in the middle of a massive migrant intake.

As my three graphs indicate, we can now look forward to an economic boom kicking off, followed by the potential for property prices to double in the next few years. Even though house prices have slumped in recent months, we are still in the beginnings of a housing market boom.

As the graph shows, property prices are well ahead of where they were when the current boom started in 2020. In some cities, such as Perth and Adelaide, housing prices are currently at record highs, while the average capital city growth since March 2020 is 25 per cent.

Even though every capital city has experienced price growth over the last three years, the variations extend not just between cities, but to their suburbs as well, with some locations booming while others have experienced little to no growth at all.

Locations which suffered most will have the greatest growth potential

In years to come, the current slowdown will be just a tiny dip in a sea of price growth and investors have a unique opportunity to benefit.

This is because the locations with the greatest potential will be those which suffered most during the lockdowns and border closures.

As the dynamics of our housing markets undergo a complete reversal, those locations which experienced years of low demand with little to no price and rent growth will be sleepers set to boom.

Posted on March 27, 2023March 27, 2023 by John Lindeman

Winning and warning signs

Every investor needs to know when it’s the best time to sell and the right time to buy. Some rely on gut feel or intuition, while others may be motivated by gossip, hearsay or headlines. Rather than relying on such flawed methods, John Lindeman reveals how to find early winning signs of growth, and early warning signs of decline.

Do we buy, sell, or hold? Buying or holding on at the wrong time could lead to huge losses if prices start to tumble and buyers disappear, but it’s just as painful to sell just before a big boom occurs and prices dramatically escalate. So, we need to know whether property prices are likely to boom or bust, but where can we get the right information?

We are bombarded by a seemingly endless array of confusing and even contradictory advice about whether it’s the best time to sell.

We don’t have to read tea leaves or gaze into crystal balls to get an answer, because there are stats out there to help us make the right decision.

Sale prices only reveal the past

Some experts rely on past sales and price trends to forecast the future. After all, it seems logical that falling buyer demand indicates it’s time to get out, while rising buyer demand tells us that it’s best to hold. But, past sales and price information is already months old before it’s published, and market conditions keep changing.

Future performance is likely to be very different from what past sales and prices are showing. It’s like using your rear view mirror to see which way the road ahead is turning.

Rather than looking backwards at past sales, we need to look forwards at potential sales instead. Luckily, this data is available on-line and it’s free.

The early winning sign of growth

Potential sales are called listings, which are provided on public listing sites for all types of property and for any suburb. You can use listings data as an early winning sign, indicating that prices could rise if listings are falling. Here’s an example of how it works.

Sussex Inlet is a beautiful coastal holiday location on the New South Wales South Coast, and it was one of my selections for Your Investment Property’s Annual Top 50 for 2022.

My choice was not only assisted by its popularity as a tourist and retiree destination, but because the number of houses listed for sale had consistently fallen during the second half of 2021, indicating that strong price growth was likely to occur during 2022.

The result? Sussex Inlet was the best performing property market during 2022, experiencing a median price rise of nearly 50%. As the graph shows, price rises occurred because the number of houses listed for sale had been falling every month.

The graph also shows you that the number of houses listed for sale in Sussex Inlet then started to increase in the second half of 2022, and quickly grew higher than they had been before the price boom started.

This was a sign that prices could start to fall again, which they have in recent months.

So, you can also use listings as an early warning sign, telling you that buyer demand is slowing down, and prices may start to stagnate or even decline.

The early warning sign of decline

Although our housing markets boomed from 2020 to 2022 during the two years of the pandemic, there were some dramatic exceptions such as the Melbourne CBD unit market, where prices crashed. The graph shows how the listings trend suddenly reversed during 2020, serving as an early warning sign of price falls. Listings continued to increase all through the pandemic years, (highlighted in grey).

This was because lockdowns and border closures resulted in a near total collapse of rental demand in the Melbourne CBD rental market and many investors tried to sell at the same time.

Thankfully, the lockdowns and border closures are behind us, and the graph shows that unit listings in the Melbourne CBD are now rapidly declining.

In fact, the number of units listed for sale is trending down to the boom levels of 2016-17, and sale prices could surge as a result.

Tracking the number of houses or units for sale in a suburb or town is easy, and it’s free. When making those all-important buy, hold or sell decisions, you obviously need to rely on much more data than just the number of listings, but they do give you an early warning sign that prices are likely to decline, or an early winning sign that they have the potential to rise.

Posted on February 20, 2023February 20, 2023 by John Lindeman

One enduring legacy of the pandemic

During the COVID-19 pandemic years our government battled to keep the economy in growth despite lockdowns and border closures by creating massive amounts of new money. We are about to experience the legacy of this strategy in the form of higher interest rates, inflation and rising housing prices.

At the onset of the pandemic, most economists and analysts believed that lockdowns and border closures would send our economy into recession.

Huge fiscal stimulus packages were rolled out, designed to keep the economy ticking along until the crisis was over. The government pumped one trillion dollars of newly minted money into the economy, created by and then borrowed from the Federal Treasury at historically low interest rates.

The resulting relief schemes gave welcome financial support to workers and businesses and while much of this largesse was deemed necessary, our economy is now awash with nearly one trillion worth of dollars that didn’t exist before the pandemic.

This time it was going to be different

Printing more money has always led to higher inflation, but this time, the experts assured us, the huge amount of “quantitative easing”, (which is what economists call money printing) would not lead to inflation. The reason was because it was designed to keep the economy in growth, rather than generating more spending power.

Although we were assured it would be different this time, basic economics dictates that creating money causes more demand. Without more supply, inflation is the result. The trillion dollars of new money washing around our economy will continue to generate inflation until inflation itself slows down the level of demand.

Since its creation in 1959, the Reserve Bank’s mantra has been to control inflation, but its only tool is the cash rate, which sets benchmarks for home loan interest rates. This means that whenever inflation rises, interest rates follow. Right now, these two unwelcome newcomers are once again impacting the property market, but what is the likely outcome for housing prices over the next few years?

Inflation and housing interest rates are linked

The Reserve Bank has always used interest rates to control inflation, and the first graph shows how this has led to home loan interest rates and inflation being closely linked since the Reserve Bank was created in 1959. You can also see that interest rate movements have tended to lag behind inflation changes by at least a year.

The lag in interest rate rises shows how the Reserve Bank has reacted to changes in inflation rather than trying to anticipate them – except for the last nine rate rises. This time around, interest rate rises have coincided with increases in inflation. This could mean that the bank believes that interest rates are far too low, or it may be that the RBA expects inflation to rise more quickly than previously anticipated, or it could signify both.

The graph also demonstrates that since the nineteen seventies, home loan interest rates have always been higher than the prevailing inflation rate – except for right now. This also means that interest rates may rise further, at least until the rate of inflation reduces.

Interest rates have never had a long term impact on housing prices

This next graph shows that higher interest rates, which at times exceeded thirteen percent during the seventies and eighties, had no negative impact on house prices. In fact, even during the worst periods of high interest rates, housing prices rose annually by ten percent and more.

The reason for this apparent contradiction is that housing prices are influenced by inflation significantly more than they are by interest rates. The next graph shows the close correlation between inflation and house price movements. The reason for this is that inflation affects all households, whether they are homeowners, renters or potential buyers, but only a small percentage of households are seriously impacted by higher interest rates.

One third of our dwellings are fully owned without any mortgage, while another third are owned by investors who can claim interest costs as a tax deduction and can also recoup them from tenants by periodically increasing the rent. According to the ABS, the total value of mortgage debt is only twenty percent of the value of all residential property and only around ten percent of homeowners are recent buyers who are now paying higher interest rates than when they purchased their homes.

This explains why interest rate movements normally don’t play a large part in house price changes, but also prompts us to ask why the recent rises in interest rates have led to house price falls.

How the housing market is likely to perform over the next few years

The reason that housing prices have been falling in many locations is because the market is in a state of shock after we were assured that there would be no rate rises until this year, and were then slugged with a record number of consecutive interest rate rises.

This has led to a widespread fall in buyer confidence, even in areas where most buyers are investors, upgraders or downsizers and as such, are relatively immune from rate rises. This pessimistic outlook will quickly dissipate once interest rates stabilise in future.

In coming years, house prices are far more likely to perform in line with inflation, along with other goods, services, incomes and outgoings. As far as the property market is concerned, higher inflation will lead to higher housing prices and this will become the most enduring legacy of the pandemic.