Interest Rates & Prices

I have frequently highlighted the poor track record of economists in predicting outcomes in real estate markets across Australia – and in particular the embarrassingly bad record of economists working for the Big 4 banks and for other major institutions like AMP Capital.

 

Their forecasts for house prices at the beginning of each of the past five years have been so far off the mark, it’s puzzling that the big-name economists who made these blunders have kept their jobs.

 

Because what these outcomes mean is that these boffins have a very poor understanding of residential real estate – and that, after all, is a significant part of what they are paid their fat salaries to be good at.

 

The most puzzling thing is that there’s a clear and obvious reason they always get it wrong – they think that the major determinant of house prices is what’s happening with interest rates.

 

Big bank economists cling to their pet theory that if interest rates are high and /or rising, prices will fall. And if interest rates are low and /or falling, house prices will rise.

 

In the mindset of these over-rated and over-paid bureaucrats, nothing else is in play. Not economic growth, not government stimulus, not population trends, not major infrastructure investment, not basic supply and demand factors, nor new and emerging trends like the Exodus to Affordable Lifestyle or the Rise and Rise of Apartments.

 

For them, it’s just interest rates. I know primary school kids with a more sophisticated understanding of real estate dynamics.

 

If the bank boffins were worth their salaries they would have noticed what happened with national property prices in 2023 and again in 2024, in both cases years of solid growth, in defiance of their forecasts that prices would crash because interest were rising or persistently high.

 

But beyond recent history, a quick study of past decades shows that their theory about interest rates and property prices is a false and failed philosophy.

 

Throughout the past 40-50 years, property markets in Australia have pretty much done the opposite to what the modern economist mindset suggests SHOULD happen.

 

The highest interest rates in my lifetime occurred in the 1980s. Throughout that decade mortgage rates were commonly above 10% and went as high as 17-18% towards the end of the period. 

 

And yet some of the biggest property price growth in the nation’s history occurred during that period of insanely high mortgage rates – with the capital city median dwelling price rising 141% - from $59,000 in 1980 to $142,000 in 1990. 

 

The growth in the second half of that decade, when interest rates were at their highest, was 75% - with the median dwelling price lifting from $81,000 to $142,000.

 

Interest rates were much lower during the 1990s, but dwelling values grew at a much slower rate in that decade, rising just 46%. So, to repeat, prices grew 141% in the 1980s with record high interest rates (up to 18%), but grew only 46% in the 1990s with interest rates much lower, down as low at 7%.

 

The early part of this century was another period of rising interest rates, but price growth picked up – rising 114% from 2000 to 2010.

 

Interest rates were considerably lower between 2010 and 2020, but the rate of price growth slowed significantly, compared to the previous decade when mortgage rates were higher.

 

The median dwelling price rose only 20% between 2010 and 2015, and just 23% between 2015 and 2020, despite mortgage rates getting down to around 3%.

 

Since 2020, we’ve seen dwelling prices grow much faster – up 36% overall in four years, despite the recent period of high and rising interest rates.

 

It’s pretty clear, isn’t it – so clear, in fact, that even a bank economist could understand it. Since 1980, dwelling prices have done the opposite to what bank economists say they should do – they have risen most strongly when mortgage rates have been high and the price growth has been weakest when interest rates have been low.

 

There have been one or two exceptions and aberrations along the way, including in 2021 when we experienced high price growth at a time of low interest rates, but that was generated by a host of other major influences, including government stimulus measures.

 

Beyond that, what the data tells us again and again, is that we’re more likely to have rising property prices when interest rates are high and rising. 

 

And, when you think it through, it makes perfect sense – we get rising interest rates when the economy is strong, unemployment is low and consumers are spending – in other words, the sort of circumstances when people are more likely to be out buying real estate.

 

For the record, how much have Australian dwelling prices grown in the 44 years since 1980? They’ve grown, on average, 1440 per cent.

 

There’s been some level of growth in every five-year period since 1980, quite oblivious to what’s been going on with interest rates.

 

Right now, there’s lot of speculation from economists and other commentators that when the Reserve Bank eventually cuts the official rate, perhaps early in 2025, it will ignite property markets and cause property prices to rise.

 

These kinds of views, repeated multiple times in news media every day, have resulted in most people believing that property markets are indeed driven by events with interest rates.

 

History, including recent history, proves it simply isn’t so.