Housing boom then bust?

Why the next property downturn could be record-setting

Housing boom then bust?

The bullish housing run could be nearing its end.

In his latest column for the Australian Financial Review (AFR), Christopher Joye noted six major market crashes since 2003 ­­­– the biggest fall of 10.2% recorded in 2017 after APRA tightened its lending restrictions. The drop was then followed by a remarkable 30% upturn in the housing market. 

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Joye claimed what happened in 2017 was far worse than both the global financial crisis and the recent pandemic-induced recession. However, the 2017 incident outperformed the current market which saw capital gains rising only up to 21% once economic restrictions eased, giving a glimpse on what this could mean for the impending housing crash.

Now, the industry looks to the Reserve Bank of Australia (RBA) for the future of the next housing boom and bust.

On its 10th consecutive month, the RBA has pledged to hold the cash rate steady as businesses reopen in the nation’s largest economy. One expert said that although the RBA could quickly change tactics on yield target as soon as next week, a shift in the cash rate is highly unlikely until the latter half of 2023.

As such, home values are expected to rise to another 5-10% points until the RBA hikes or banks decide to lift mortgage rates.

“Yet if and when the RBA does seek to normalise the cash rate, prices should fall, as night follows day. And if the RBA is able to lift rates by 100 basis points or more, it will likely be the largest correction on record,” Joye wrote in the AFR.

Read more: RBA makes cash rate call

Joyeis a firm believer that home values will decline by 15-25% given normal rate trajectories over a 12-month period. Of course, the figure could be much smaller if RBA tempers from its projected pace.

If the RBA’s internal housing valuation model is taken into account, a staggering 33% drop is imminent in a 100 basis points scenario ­– a record-setting crash that would put homeowners in despair.