Evans would prefer to see an immediate cut with an explicit easing bias, regardless of whether that bias was later acted upon.
Discount rates and fair values
Such a model can be used in order to weigh up a rent versus buy decision through discounting expected future cash flows and using real mortgage rates as the discount rate.
It has always been my contention that while sustained real rental growth is likely in certain land-locked capital city areas due to growing demand and inelastic supply (e.g. inner ring Sydney), it is unrealistic to expect this to occur in most regional or more elastic outer suburban markets over the longer term.
These same forces are also what give rise to expected future capital appreciation - although to some extent this is offset by the discounting applied to the final capital gains upon sale.
While the future of course in unpredictable, a widespread belief that mortgage rates will be lower in the future than they were in the past are a key input into the fundamental value of housing - and by taking on greater household debt, the market has pushed in turn paradoxically pushed the "neutral" rate of interest lower.
Capital city markets with an expanding population will always cycle as construction and therefore dwelling supply ebbs and flows in response to demand.
CoreLogic's preliminary weekend auction clearance rates from Melbourne (and possibly even to a certain extent Canberra) and a huge surge in the latest housing finance data suggest that it is not only folk in Sydney who presently feel this way.
For all of the above, real dwelling price growth through this cycle outside the largest cities has been weak, suggesting that the easy gains in Australia's housing markets took place further towards the left of the interest rate history chart above.
One of the issues facing property market commentary has been recency bias which has led to some unrealistic expectations of real growth in perpetuity in more elastic markets where this was never probable, or even likely.
Greater Sydney has suffered from a chronic supply deficiencies which should have been obvious to observers close to a decade ago, and despite an increase in approvals, the lack of appropriate supply is now coming home to roost.
There is an avalanche of data due out this week, so stay tuned for that!
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