Cash Rate or Crash Rate?

Breaking News – RBA lifts cash rate another 0.25% But what does it mean to a private lender, and how should we analyse risk?

It seems totally appropriate to me that in our statistically voracious world, the adage “There are three kinds of lies: Lies, Damned Lies, and Statistics” — has been attributed to Mark Twain, who himself attributed it to British Prime Minister Benjamin Disraeli, who might never have said it in the first place.

Lies, damn lies, and statistics. Do statistics relating to the decline in home values around Australia “speak with a forked tongue”?

Yes and no.

In simple terms, I have been unable to find statistics that drill down the way I’d like for my practical needs. Loan to valuation ratio (LVR) is the single most important determinant in private mortgage lending. And in a softening valuation market, it’s not only the direction, but also the pace of that softening which is important.

Numbers that I’ve been able to find regarding recent house price reductions are interesting in general trend terms, but they seem to only relate to the real estate adage – location, location, location – broken up as to Australia, State, City/Town, and even suburb.

What is missing, is price point analysis within those locations; and in my view, that is what a private lender needs to determine current LVR and risk profile.

There is no doubt that the general trend for house prices has been down for some time. Briefly, in that context, it is interesting to note that CoreLogic’s national Home Value Index in January declined by 1.0%, after the decline on December was 1.1%. ?This January reduction was the smallest month-on-month decline since June last year.

The consensus seems to be that house price reductions will continue.

Today, Reserve Bank of Australia (RBA) called its ninth consecutive interest rate hike since May last year, upping the official cash rate to 3.35 per cent on Tuesday (7 February) - the highest level since late 2012. It is largely expected to increase further at the next RBA board meeting on Tuesday, 7 March 2023.

PropTrack director for economic research Cameron Kusher commented: “At the beginning of May 2022, official interest rates were sitting at 0.1 per cent. By the end of 2022, the cash rate had increased to 3.1 per cent.”

“Today, the Reserve Bank lifted rates another 25 basis points.

“With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls.

“Nationally, we are forecasting prices to fall by a further 7 per cent to 10 per cent by the end of this year.?

He added: “With the RBA’s hike of 25 basis points today, we’re expecting an additional rate rise of 25 basis points, or thereabouts, likely to follow next month.

“Thereafter, we expect rates to remain on hold, with the potential for them to be reduced in late 2023 or early 2024.?

“We anticipate these further interest rates rises will push prices lower. However, a lower interest rate peak and earlier than expected interest rate cuts could ease price falls,” Mr Kusher stated.

And all of that is very interesting. But wouldn’t it be great if we could form a view on LVR appetite based on the inter-relationship of location by price point? If someone can point me in the right direction, I’m all ears.?

Steven Acworth