When will the cycle turn for the Sydney housing market?

10 November 2021

Steve Thaxter- Senior Partner and Principal Adviser

Sovereign Wealth Partners



How close are we to the top of the house price cycle? No-one knows for sure, but plenty have an opinion. This article concludes with my own, along with those of two high profile commentators.


But firstly, what drives the house price cycle? Given the supply of houses in Sydney’s coastal fringe is relatively fixed and provided we have a reasonably stable job market, we believe it is interest rates and borrowing power that drives Sydney housing prices. More than anything else, house prices are five times higher than they were in 1989 simply because mortgage interest rates have fallen from 19% per annum to under 2%, the lowest rate on record. And when the banks tell us we can borrow more because interest rates have gone down, what do we do at auctions? We spend more. The reverse happens when interest rates go up of course. Although many others I talk to seem to be in denial on that point. So, if we’re trying to pick where we are in the cycle, it’s my view that it’s all about what happens to interest rates from here.


Like many other central banks around the world, The Reserve Bank of Australia (RBA), has set the cash and borrowing interest rates artificially low. Not to turn house auctions into bidding frenzies, but in response to surplus capacity in the economy, low inflation, low wages growth, fears of deflation and of course the pandemic. But for how long will that continue to be the case?


On the one hand, the ultra-low rates are supposed to be around for a long time yet and the housing market still looks very strong. For example:

  • The RBA reassured us last week that the economy had plenty of surplus capacity and their central case remained that cash rates would stay unchanged until April 2024. Or, if wages growth and inflation come through stronger than expected, 2023.

  • Over the weekend (5 and 6 Nov), the Sydney auction clearance rate was 75%, a little under previous weeks but still well up on the November average, meaning that demand is strong and sellers’ expectations are being met.

On the other hand, aren’t economists notorious for extrapolating current conditions and ignoring the winds of change? Can the lowest interest rates on record really be sustained for another two years? Consider that:

  • Underlying inflation in Australia has already broken up into the Reserve Bank’s target range of 2-3%.

  • Despite lockdowns, by mid-September the official unemployment rate had fallen to a 13 year low and private sector wage growth had ticked up to 2%pa. Wage growth may be short of the RBA target of 3-4%, but it’s firmly on the move.

  • As the Australian economy re-opens, labour shortages and inflation have been reported across multiple industries.

  • Despite the official cash rate remaining unchanged, the price of money is on the way up. Almost all interest rates in fixed interest markets are significantly higher. Even the RBA has given up artificially holding April 2024 government bonds at 0.1%. Bond rates set the pricing for fixed rate mortgages, explaining why Westpac announced a 0.21% rise on its 3 year fixed mortgage last week.

For my money, I think the RBA will have to move early with interest rate rises. Perhaps within a year and so that's when I think the housing cycle will turn. I don’t see the RBA can wait another two and a half years. But that’s just me, what do the so-called ‘experts’ say? Westpac’s chief economist Bill Evans is tipping for a 6% rise in Sydney house prices in 2022 before a 6% fall in 2023. Sounds nice and gentle, as you might expect from a lender! But Coolabah Capital’s Chris Joye sees 5-10% upside from here followed by a collapse of 15-25% if the RBA is forced to raise rates by 1%. Just 1%? I dread to think how a 2% rate rise might play out. Only time will tell, but it’s worth thinking about if buying a home today. For those interested we attach Chris Joye’s rationale below, which was published on 3 November.

Why Aussie house prices will fall circa 20% when the RBA hikes interest rates
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Download PDF • 141KB


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