The Reserve Bank has picked its winner on Melbourne Cup day and it wasn’t households. The cash rate is now 4.85 per cent. That is the fifth rise this year and the highest the rate has been since late 2008.
And it came the day after we found out home values are falling faster than at any time in the past 40 years.
Inflation didn’t give the Bank much choice. Prices rose 4.3 per cent in the year to September and housing was the biggest contributor. The Bank has a job to do and I am not going to argue that it didn’t have a case. But we need to be honest about who is paying for it, and what it is doing to the homes we are going to need in two or three years.
Raising rates into a falling market
Cotality released its October numbers on Monday and they don’t make good reading. Home values fell 1.2 per cent nationally, the seventh monthly fall in a row. Capital city values are now down 8.1 per cent from the peak. The biggest fall in 40 years was 8.2 per cent between 2017 and 2019, so we are only a fraction off that record, and Cotality’s Tim Lawless expects it to be broken in early November.
Brisbane has been hit the hardest. Values dropped 2 per cent in October alone, more than any other capital. According to Cotality, virtually every suburb in Brisbane has fallen over the past three months, and early auction results last week had only about one in four Brisbane auctions selling. Sydney is down more than 10 per cent since February, and AMP now thinks prices could fall around 15 per cent from top to bottom.
This is the part I think the policymakers are missing. The price of an existing home isn’t part of the CPI. So the RBA is pushing down home values that aren’t even in the inflation number it is trying to control. The parts of housing that are in the CPI are rents and the cost of building a new home, and they keep going up because we aren’t building enough.
Falling prices aren’t helping first home buyers much either. Tim Lawless from Cotality made the point that the deposit is no longer the hard part. The hard part is being able to service a 95 per cent loan at these interest rates.
Average Australians are paying the bill
On a typical $600,000 mortgage, every quarter point rise adds about $91 a month, according to Canstar. Add up five rises this year and that family is paying around $460 a month more than they were in January. That’s roughly $5,500 a year out of after-tax income, and for a lot of people it’s on a home that is now worth less than it was in March.
Roy Morgan already has nearly one in three mortgage holders at risk of mortgage stress, about 1.75 million people. It reckons a rise to 4.85 per cent pushes that to 1.82 million. Renters aren’t getting off lightly either, with rents up 5.5 per cent over the year.
These people aren’t speculators. They are nurses, tradies and young families who did what they were told. They saved a deposit, bought a home, and now they are carrying the inflation fight on their own.
Government spending is part of the problem
The RBA can only put the brakes on private spending. It has no control over government spending, and government spending has been running hot.
Governor Michele Bullock told a Senate committee in February it was a “mathematical fact” that government spending adds to demand. In September she said public and private demand were “both adding to aggregate demand”. She is careful not to blame anyone. I’m not a central banker, so I will.
The economists have been saying it since the May budget. Saul Eslake said the budget did nothing in the near term to reduce the risk of more rate rises. The OECD has told Australia to bring down its structural deficits.
The Treasurer says four dollars in every five of demand is private and that the budget isn’t a primary driver. That may be so, but if one dollar in five is government and that dollar keeps growing, every household with a mortgage pays for it through the RBA. It is a bit like one horse in the Cup being allowed to run without carrying any weight.
One lever isn’t enough
Interest rates are a blunt tool. Even the Prime Minister is now calling them a blunt instrument. They hit people with a mortgage and leave most other people alone. Deloitte Access Economics says the burden is falling more and more on mortgage holders and renters, and they are mostly younger Australians.
A lot of this inflation isn’t even made in Australia. Fuel prices went up 9.4 per cent in September alone. The Governor herself has said there is no one for one relationship between interest rates and petrol prices. Putting up the cost of a mortgage in Brisbane doesn’t bring down the price of a barrel of oil.
Using one lever to control inflation isn’t good economics. It is just the only lever anyone is prepared to pull.
The homes we need aren’t being built
Now to my own industry. New home prices went up 4.7 per cent in the year to September as builders passed on higher costs for materials and labour. Existing homes are going the other way, down 6.7 per cent nationally since March and falling fastest in Brisbane.
Every rate rise makes that gap bigger, so buyers look at it and buy the existing house down the road. That might suit the buyer, but it does nothing for the 1.2 million new homes governments have promised by 2029. Buying an existing home doesn’t add one extra home to the country.
You can see it in the numbers. HIA’s new home sales fell 17.5 per cent in the September quarter and Queensland was down by more than a quarter. Mirvac sold just 429 homes in the quarter, down 17 per cent on the quarter before, and Stockland says enquiries are down 71 per cent on a year ago. We started about 204,500 homes last financial year when the Housing Accord needs 240,000 a year.
Right now we have a record number of homes under construction because of sales that were made a year or two ago. When those homes are finished there is nothing coming along behind them. Today’s slowdown is 2028’s shortage, and shortages mean higher prices and higher rents.
I’ve seen this in previous downturns: when work dried up, trades moved to other industries, and when demand returned, builders couldn’t bring that capacity back quickly. Trade availability tightened, lead times stretched and building costs rose.
Why now is the time to build
I should declare my interest. I’m Chairman of a home builder, so weigh up what I say. But I think the numbers make the case on their own.
Yes, existing homes are cheaper than they were in March and they might get cheaper again. Waiting for the bottom of the market can work when you are buying an existing home. It doesn’t work when you are building. The cost of a slab, a frame and a tradie hasn’t come down. It is still going up, and it will go up faster when demand comes back. The best time to build is when everyone else is sitting on their hands.
Builders have capacity at the moment. Trades are available and build times are shorter than they were in the boom.
The incentives favour new homes as well. In Queensland, first home buyers can get a grant of up to $30,000 on a new home under $750,000, and pay no transfer duty on a new home. Neither of those applies to an existing home.
From 1 July 2027, negative gearing on properties bought after this year’s budget night will only apply to new builds. That is law, not a proposal, so investors who want the deduction will need a new home.
When rates do turn, and they will, buyers will all come back at once and costs will jump. Lock in a fixed price before that happens.
Do your homework first though. Test your repayments at a rate at least one rise higher than today, get a fixed price contract, check your builder’s licence and insurance (I wrote about the questions to ask before you sign with a builder last month), and know the deposit limits. In Queensland the QBCC caps the deposit at 5 per cent for most new home contracts. This is general information, not financial advice.
My message to government: stop spending
Builders can’t fix this on their own, and households shouldn’t have to carry it by themselves.
Stop spending. Every new program and every extra dollar of government spending gives the RBA another reason to keep rates high. Get the deficit under control and take the pressure off households.
Stop adding costs to new homes. Fees, levies, charges and delays all end up in the price of the build, at the same time as you are asking the industry to build more.
Speed up approvals and land release now, so we are ready to go when demand comes back.
Keep skilled trades coming in, so we don’t lose the workforce while things are quiet.
The bottom line
The RBA lifted rates on Cup Day into a market that is already falling faster than at any time in 40 years. Canberra still hasn’t done its bit. Until governments pull their weight, households will keep paying for it through their mortgages, and the homes we need in 2028 won’t get built.
Darren Wallis is Chairman of G.J. Gardner Homes and was its CEO and Managing Director from 2000 to 2020.