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Down and up? Place your bets on house prices and interest rates

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Next Tuesday presents the last opportunity this year for the Reserve Bank?to provide some insight into the outlook for interest rates next year - having already told us they won't be changed in 2017.

The big interest rate punt is now whether the RBA will move the rate up in 2018,?or whether it will need to wait until 2019.

Meanwhile this week's betting game is focused on what will happen to house values in the month of November - the result will be released on Friday. They have been static now for two months at a national level, but have fallen?in Sydney in September and October.

For what it's worth, I would be putting money on no rate rises in 2018 and not until the later half of 2019 - if?at all.

And as for the property market - short odds that it will be down, but the percentage fall is a complete wild card.

It's worth noting that because clearance rates in property are falling (ie fewer buyers are offering the prices that sellers are expecting),?the real value of residential property could be lower than the official figures will print.


The bets on interest rates and house values are firmly connected because if the property market falls?precipitously, it will be another factor inhibiting any move by the RBA to raise rates.

(A few years back it was the rapid fall in the interest rate that spurred the massive gains in the value of the housing market.)

Over the past six months economists have been revising their predictions - pushing the time frame for rate increases out by another six months or more.

Now around 70 per cent of them are looking for rates to move up in the middle of next year.

But there is a growing band of experts pushing the likelihood out to 2019.

Indeed comments in a speech from RBA governor Philip Lowe last week play well for pundits who are predicting rates will rise later rather than sooner.

Lowe strongly reaffirmed that economic conditions were not ripe for rate rises. He?has lately come to the view that wage growth?will remain?stubbornly low, and inflation along with it.

The government is a bit more optimistic, but there is a strong vested political interest in talking up its economic management.

It's interesting to see that Lowe was at great pains to say that the next rate movement was more likely to be up than down.

Sure, the RBA doesn't want a repeat of the experience a few years ago when the property market looked like it had peaked, following some macro-prudential tightening, and the central bank?reduced rates only to see the property market take off again.

But if the housing market falls a meaningful way AND wages growth remains?stalled AND inflation is below the RBA's own targets, then there should be a strong argument for interest rates to go down rather than up.

There is a very different feel about the property market today than there was a few years ago.

The effort by the banking regulator, the Australian Prudential Regulation Authority, to de-risk the housing market has been far more intense and relentless.

The banks are becoming far more stringent about where they are lending, the nature of their security, the type of borrower and their assessment of the ability of customers to meet interest payments.

For its part, APRA is placing far more pressure on lenders to better assess borrowers'?living expenses and the extent of other loans they may have.

The Commonwealth Bank, the nation's largest mortgage lender,?has just outlined to mortgage brokers that it's about to launch a major overhaul of its lending policies in a bid to "ensure the long-term sustainability of the property market".

The crackdown will include toughening of existing lending policies, such as increasing deposits, and the introduction of new measures that will make it harder for borrowers in higher-risk suburbs to get loans.

It isn't the first of the major banks to access loans by postcode - it's just the most recent.

A recent report from UBS revealed the alarming proportion of what it called 'liar loans' - the?$500 billion of loans in the Australian banking system that are based on factually incorrect borrower information.

The combination of all these factors will only place further pressure on property prices as it crimps demand for loans.


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