David Nguyen on the end of the rate-driven housing cycle
Meridian's chief economist argues that the relationship between the cash rate and housing values has weakened to the point where forecasting from rates alone is no longer defensible.
David Nguyen has been forecasting Australian housing for fifteen years, nine of them inside a major bank. His current view — that supply now explains more of the variance in capital city values than monetary policy — puts him at odds with most published forecasts.
“The rate cycle stopped being the main story about eighteen months ago.”
David Nguyen, Chief Economist
Q.Why do you think rates have stopped driving the market?
Because the transmission mechanism runs through borrowing capacity, and borrowing capacity is currently constrained by the serviceability buffer rather than the offered rate. A 25 basis point cut moves the assessment rate from 9.1 to 8.85 per cent. That is not nothing, but it is not a cycle turner either.
Meanwhile the difference between Perth and Melbourne over three years is about 25 percentage points of value growth, and both cities face the same cash rate.
Q.What replaces rates in your model?
Completions per thousand of population growth. It is unglamorous and it explains more than anything else we have tested. Perth, Brisbane and Adelaide all sit well below one. Melbourne and Canberra sit above it. The value outcomes follow almost exactly.
Q.Melbourne is the exception people cite. Is it?
Melbourne is the confirmation, not the exception. It has had the most supply and the weakest growth. What is changing is that its apartment supply has collapsed while its detached supply has not, and you can already see the two segments separating in the monthly data.
Q.Where does that leave build-to-rent?
In a better position than the sector itself believes. Institutional capital wants the exposure and the operating numbers are proving out — occupancy above 96 per cent, rent growth below market, which is exactly the risk profile the funds underwrote. The constraint is delivery cost, same as everything else.