Housing Markets in the ’20s

Economically unprecedented lending conditions are creating an uncertain future for housing prices as we move into a new decade.

As has been widely publicised in the last 12 months, central bankers’ target cash rates are plummeting. In Australia, they sit at 0.75%. America is under 2% and has just faced its third cut for the year. Japan has remained at their unconventional -0.10%. The United Kingdom mirrors Australia’s. The European Central Bank is providing nominal rates of 0% for its refinancing operations.

In a sentence, rates are precariously and pervasively low. The impact of this has been partial or full pass-on’s of these rate cuts from banking institutions to their customers. Debt is becoming cheaper. Interest repayments on mortgages are easier to amortise. The impact of this outcome has been a monetary policy-driven demand for major assets such as houses. As a result, prices have risen when aggregate demand for other durable goods have fallen.

An economist would be inclined to label this phenomenon a bubble. After all, there is – arguably – artificially created demand for an asset with volatile value in a world teetering on the edge of an economic downturn. The problem with finishing the analysis here is that this logic assumes the bubble will burst. In other words, suggesting that the housing market has reached a bubble of some kind would imply that there will be some determinant factor which pops it. Given the current macroeconomic condition of the world economy, it seems unlikely to come soon.

Central bankers and monetary policymakers have little to no room to move. More stimulus is required to heave their countries out of negative growth, but rates are already at rock-bottom. They could collectively move into negative rates, but there is an absolute limit on the effectiveness of doing that; customers would eventually hold onto their cash for a nominal return of zero percent (versus, let’s say, -2.0%). Consequently, it could reasonably be assumed that low-interest rates are here for the long-term (a fact reflected by a few 30-year Government Bonds in Europe selling at 0% coupon rates).

A central bankers’ second-favourite tool would likely be quantitative easing, which would further raise the prices of assets such as houses by providing ‘free money’ to the financial system. The implication of this, however, is that housing repayments will only get more comfortable to meet. See, for example, Denmark; where Jyske Bank A/S has offered customers a negative interest-rate mortgage. Customers get paid to hold the loan, effectively decreasing their periodic repayments. Customers get paid to take on debt. Such is the direction that lending is heading. And if it is, demand for major assets will only increase despite the looming signs of imminent economic downturn. The question, then, becomes: Will a decrease in aggregate demand created by an economic recession have a greater or lesser effect than the manufactured demand for housing created by uniquely low lending rates?

The answer may come in the form of cash-rich institutional investors and the ability of the ACCC and APRA to monitor their competitive behaviour. The historically low lending rates opens up the opportunity for more infrastructure and property projects to become financially viable for institutional investors. Required returns fall, and thus more possibilities arise. Consequently, cash-rich institutions could utilise the current banking climate to embark on a massive spending spree to expand their operations and future cash flows while concurrently fuelling demand in the housing market, thus sustaining prices and surely pleasing fiscal and monetary policymakers. Even if owner-occupiers and smaller investors sell off their operations due to financial hardship, institutional investors could potentially leverage the opportunity to increase their portfolio. In this hypothetical outcome where a few select cash-rich institutions hold a major share of properties in the nation, it would be up to ACCC and APRA to ensure that they do not utilise their oligopolistic circumstances to demand high rents from occupiers in a cartel-style business model. Doing so would gut working people of disposable income and further deepen an economic downturn. If, however, rental repayments remained reasonably priced, then renters could continue to work and spend while institutional investors consolidate their cash flows to progressively ease the mountain of debt they would have accrued to obtain their position.

The ’20s are around the corner, and the housing market is entering a unique period in its history. It will be up to regulators and banks to try and reconcile their desire for institutions to demand assets against their wariness about letting them become powerful enough to tilt the nation’s economic position.

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