Alan Kohler on why house prices will keep falling | ABC News Daily podcast

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After its latest meeting, the Reserve Bank has kept interest rates on hold.Should we get used to rates being higher than we've become accustomed to in recent history?Today, the ABC's finance expert, Alan Collar, what to expect in the months ahead and why the real housing price slump has only just begun.I'm Sam Hawley on Gadigal land in Sydney.This is ABC News Daily.

The property downturn is here and it's deepening.

Figures from property data firm Kotality shows a broader and deeper downturn in the housing market for July, with property prices dipping by 0 .7 per cent across the country.

While Sydney, Melbourne and Canberra are all down over 1 per cent, Brisbane and Adelaide have also fallen by 0 .6 per cent and 0 .2 per cent respectively.

Higher interest rates and tax changes are being seen as factors in a further softening of the housing market.

There's a whole range of factors playing out.the housing market.Interest rate movements earlier this year, higher fuel costs, the heat of confidence from the war in the Middle East.

If you've waited to the end to admit this is the time to do so.

Alan, there is this weird thing happening at the moment because not very long ago we all seemed incredibly worried about rising house prices and now we're really worrying because the price of houses is falling.

That's right.Well, some of us are anyway.I mean, I think the housing affordability remains a problem and I think it's probably true that most people are concerned about it, but obviously there is a concern that, you know, there's going to be a housing crisis.collapse and there's a few beat -ups going on in some newspapers.There was a front page in The Australian last week that said it's a $230 billion hit, which is a nice big number.And then the following day, they blamed the ALP for it.

Look, $230 billion is 1 .8 % of the total value of housing, and so it's not much.

What are we seeing?How much have house prices actually fallen?

The national median price has fallen about 2%.Sydney down by 5 .3%, Melbourne 5 .5%.So that's a fair bit.I had a graph on the news showing that the largest fall by suburbs in the country is North Curlcurl, one of Sydney's northern suburbs, which is down 20%.Wow.So that's quite a lot.

Wow.What's going on there?

I don't know, actually.Look, all the expensive suburbs are down quite a lot.You know, Toorak, Point Piper, Mosman, they're all down more than 10%.

Wow.

So look, yes, the top end of the market is down the most in Melbourne and Sydney especially and other cities like Adelaide, Brisbane and Perth are not down very much, less than 1 % so far.

Well, NAB, it is forecasting that house prices in Melbourne and Sydney will fall by 10%.a lot, isn't it?

It would be a lot.It would be more than we've seen for 50 years than living memory, really.I mean, the biggest house price falls were 8 % in 2017 and 2022.So obviously 10 % would be more than that.I think 10 % is fairly likely.Well, you know, I mean, there's three reasons for that.

One is firstly, the interest rates have gone up this year.Secondly, the budget changes have spooked investors.So Investors were tending to use property as a tax dodge, obviously, for capital gains tax and negative gearing.So there's been a big drop in investment mortgage applications that was revealed yesterday by Westpac.

Westpac says its home loan applications have fallen 20 % since the federal budget this year, when the government tightened tax concessions for property investors.

So that's quite a big fall.So investors are running away.And thirdly, I mean, and more fundamentally, housing was unaffordable.I mean, housing's too expensive in Australia.And if something's too expensive, the price comes down because people can't afford it.I mean, that's kind of fundamentally basically what's happening.

So those budget measures that you mentioned, that's the changes to negative gearing and capital gains tax, that's having a real impact, a big impact.

On investors, that's right.So we'll see what that means in terms of prices, but it's clearly having an impact and is kind of reducing some demand, but at the same time also increasing supply because, you know, a lot of investors are putting their house on the market.The change is a grandfather, so that's not going to be that much of an impact, but I think there'sgoing to be an impact of the budget and we're already seeing it.

And that's all good for first home buyers.Do we have any evidence of that yet?

Well, yeah, all the prices are coming down obviously, so North Curl, Curl, first home buyers are looking good.

Alright, well, Alan, let's consider interest rates a bit further.Now, the Reserve Bank has kept the official cash rate this week at 4 .35%.Now, you think that it will stay there for the rest of the year at least.So why do you think that?

Because, you know, I think the economy is slowing now and I don't think they'll need to put up interest rates anymore to achieve what they need, which is to reduce demand.The economy is slowing down.I think inflation is not that much higher than it needs to be, and I think inflation is on the way down.There's a divided opinion among economists and forecasters.Some say there won't be any rate hikes.Some say there will be one more.

I mean, but it's not that much of a conviction.I mean, the market, the futures market is putting a 60 per cent probability on a rate hike, roughly, and a 60 per cent chance of a rate cut next year.So, you know, it's basically, I reckon, a nail to the wall draw there.

But you don't think, Alan, that the official cash rate will really ever fall back to those historic lows?I mean, we've had the cash rate, you know, between 2020 and 2022 at point zero.1%, almost zero.And of course, it was 1 .5 % from 2016 to 2019.You think those days are over?

I do.And that was a sort of a very anomalous decade of interest rates below 2%.And that was the result of a global glut of savings.versus investment.And that's finished, that decade of interest rates being very low.resulted in house prices increasing 60 % in Australia.

That was when house prices just got completely out of control, obviously supported by a high level of immigration and a low level of housing completions.But it was fundamentally interest rates that did it.And now those days are gone because there's been a massive increase in investment required, firstly for AI, mainly for AI, but also for defence.So, you know, globalization, the days of America being sort of a global policeman, guaranteeing peace everywhere are over.So countries everywhere are increasing their defense spending and also government spending in general is kind of very high and government debt is very high.So there's this collision going on between government debt being high and spending on AI and defense spending.

also happening.And the AI spending has just begun, but it's the biggest capital expenditure boom in history, bar none.It's bigger than anything that's come before, including the spending on railways that occurred around the world, electricity spending on the wires and transmission and electricity that was needed sort of in the 20th century.So look, it's huge and that is going to drive up interest rates and keep interest rates high for decades now.

Right, okay.So do you think interest rates will stay around where they are at the moment, or are you talking about higher than this 4 .35 %?The baby boomers always like to remind us, don't they, that interest rates went up to 17 % when they were younger.I mean, they'd never go that high again, right?Because everyone would default on their mortgages.

Correct.I mean, of course.And that was a deliberate decision by the central bank and the government to cause a recession.You might remember Paul Keating called it the recession we had to have because inflation was out of control.And I mean, in a sense, it's a different problem.We don't have inflation out of control caused by oil shocks of the 70s and other problems.

What we have is an investment boom, which is driving up longer -term interest rates rather than short -term ones.What exactly happens to the cash rate, you know, I don't know.I doubt that it's going to come down much, if anything, but if there's a recession at some point, that will obviously come down.

Yeah, or another pandemic.That's how it went.

Well, that's right.I mean, so those are the sort of things you can't really forecast.I mean, the stock market is at a record high and a lot of people are saying that there's going to be a crash.caused by AI, that may be true.I don't know.I mean, it's possible that there's a crash.

I mean, it's also true that the revenue that's going to be earned by AI companies is probably going to fall short of what's needed to pay for the investment in data centres, which means at some point, you know, the market will kind of look at that and go, oh, crikey, we've paid too much and reduce the prices of the AI companies.

Well, what about immigration?How does that play into all of this, particularly, of course, with housing prices?We've seen the immigration minister, Tony Burke, he's delayed a major speech on this.So things are going to change.We don't know exactly how yet, but how does it play into it?

Yes, as you say, we don't know what they're going to do.But look, I've been saying for a while now that what they should be doing is turning the forecasts of immigration that are contained in the budget each year by Treasury into a target.they haven't had a meal.targets at all.All they've done is forecast them, and the forecasts have never been correct.In fact, they're way under.

I think it does sound like what Tony Burke's going to do now is turn the budget forecast into a target, and the budget forecast for the current financial year is $225 ,000.If that turns into a target, then they'll have to be credible.We haven't got the figure for the last financial year ending in June for net overseas migration, but it looks to have been about 300 ,000, perhaps a bit more, 305 ,000.And to get that down to 225 ,000, if that's what they say they're going to do, then that will be hard because A lot of immigration in Australia is demand driven.It's not actually, you know, the government doesn't sort of control it.But it's clearly part of the story on or needs to be part of the story on housing affordability.

I think everyone understands that they need to have an eye on demand as well, not just supply.

All right.Well, Alan, there have been seven property market downturns in the past 40 years, and it seems like it always turns around, right?And the price of housing always goes back up.Do we expect that that will just happen again on this occasion?

Well, look, it might.I mean, I talked to a few people in the housing industry.They say that there simply isn't the labour force in construction that's enough and there isn't enough productivity in construction to build the houses required.So, you know, there isn't There simply isn't going to be enough of a supply built to continue the decline in house prices.People at the coalface, as it were, of housing say that, yes, there'll be a downturn because of interest rates, but the house price is going to bounce.They think buying opportunity, if house prices come down, it's a once -in -a -lifetime opportunity to buy because house prices are going to rise because there simply aren't enough tradies to build the houses.

And so part of the migration story needs to be some increase in skilled migration of tradespeople.And that's what the Master Builders Association is calling for.They're saying that there's a 300 ,000 person shortage of construction workers in Australia, which, you know, that's a lot.I mean, I don't know where we're going to get them from, but there just hasn't, has not been sufficient focus on getting construction workers into Australia.

But in your view, Alan, this is, at this point, just the start of this housing downturn.So the 2 % decline could turn into something much more yet.

Oh, I think there's no doubt that it will.We just obviously don't know whether it's sort of 8 % as usual or 10 % or more.And what I don't know is whether the housing industry is right to say that the house prices will bounce back.House prices are too high, as I said before, and so it's hard to imagine that they can't start rising again because nobody can afford them.Yeah, I'm puzzled.

All right, Alan, you and me both.Thank you so much.Appreciate your time.

Not at all.

Thanks for listening.