Wow wee. Lots of opinions being thrown around here. You know what they say, opinions are like assholes... everybody has one. But there's another thing I've noticed and that is, that a lot of assholes have an opinion. So, I'll be another one, and have my say, on a lot of things that have already been brought up and debated on:
1. I generally agree that it's better to own than rent. But I definitely do not agree with the notion that no matter when, the best time to buy property is 'today'. No way. Sometimes it's best to wait, or find another way, not just jump into the market as soon as possible. Granted, it's very difficult to time the market perfectly, but generally speaking, it's not the best idea to buy at or near the bottom of an interest rate cycle and near an inflection point, because the risk that you could be paying too much is heightened. To this end, I agree that people could be forgiven for thinking rates might stay low for some time, because the RBA said (irresponsibly) that they wouldn't rise until 2024, but anyone with even half a clue about macroeconomics knows that that was a promise that could not be kept.
2. It's pointless bringing up what we bought in 2010 or in 2012 or in 2015, and how much money we've made on that purchase since. Interest rates back then, relatively speaking, were much higher and price-to-income multiples for property were much lower. You can talk all you like about immigration and population growth and people needing somewhere to live, but for me, the unprecedented accommodative (aka loose) monetary policy regime that started in 2010 and got looser and looser until rates hit rock bottom in late 2020 has unquestionably been the biggest tailwind for property price growth. But all of a sudden, in the last few months that tailwind has turned around and become a headwind.
3. It's categorically not true that everyone who has borrowed in the last few years has become wealthier. I'm in a job where I see what types of things can go wrong with investments and I can tell you that when it comes to borrowing to buy property, a lot of people have bought using borrowed funds as far back as 2013, and lost out big time. There are properties that were bought nearly ten years ago that are not worth anywhere near as much today. Some people have zero or negative equity nearly a decade on. Two property types that are especially fraught with danger: Regional property in areas that are prone to cyclical price adjustments (eg. some mining and touristy beach towns) but perhaps more surprisingly, and more common, inner city apartments bought new off the plan.
4. Accompanying lower global interest rates over the past 15 years, there has been an unprecedented increase in the money supply through massive quantitative easing programs all over the world, which has seen an enormous amount of moral hazard and risk build up in the financial system. All asset prices have been affected (artificially pumped up) but some more than others. You only need to look at charts showing the lift-off from the start of 2021 of the price of equities (particularly novel sectors like BNPL and tech stocks), Bitcoin and other cryptocurrencies, and property. The run ups in asset values we've seen would never have occurred but for these enormous monetary and fiscal stimulus programs. But as we speak, that stimulus is being withdrawn - quantitative tightening is now being implemented, on top of interest rate hikes.
5. I think a downward gravitational pull on asset prices is a given. With other asset types where markets are forward looking and smarter (shares and bonds) we've already seen it, although there is still some more to come. Anecdotally, property markets react slower to interest rates. It usually takes between 6-9 months for the full effects of a rate increase to impact the market. The magnitude of the decline will depend on how high interest rates will go. That in turn will depend on how quickly inflation can be brought back to what is deemed an acceptable level, which for much of the Western world, is somewhere between 1-3% p.a. And to what degree the 6-12% p.a inflation we are seeing in Australia, the US and Europe is supply-side versus demand driven. It is clear that increased demand started the problem, then supply issues made it worse. Now we can speculate all we like on which is more to blame, but the fact is, no matter how much we look into the crystal ball, no one really knows. If by Christmas inflation is back down and fast approaching 3%, then we might get off relatively lightly with a peak cash rate (here and in the US) of maybe little more than 2%. But if inflation persists and by early-mid next year is still at 6-8% globally, then rate hikes will still be on the table and the cash rate will have to be over 3% by then. And I'm afraid that won't bode well for equity or property prices.
Anyway, that's it - this asshole has had his say, for now.
