Tariff war takes toll on US markets
The US-China tariffs debacle drags on, with China hiking the reciprocal tariff rate to 125 per cent (versus 145 per cent from the US side).
There's been a nasty sell-off in US bond markets this week, possibly in part from Chinese and other foreign investors, with the 10-year Treasury yield trading at around 4½ per cent.
Obviously this battle is a net negative for trade and probably for US inflation in the short-term, while lower earnings and higher bond yields could be a toxic combination for asset prices.
Transactions in the US housing market have been somewhat frozen up over the past year or two, although prices have continued to rise, and now the 30-year mortgage rate in the US is all the way back up to 7.1 per cent.
There's been plenty of commentary about the implications for property in Australia, but of course we don't have 30-year mortgages Down Under, and the key variables here will be the cash rate target and the 3-year government bond yield from a bank funding perspective.
Demand for housing
One key factor for the housing market outlook in Australia is the ongoing high levels of demand.
Indeed, the ABS released the latest overseas arrivals and departures figures this week, and they showed that net permanent and long-term arrivals jumped to an all-time high of +159,650 in February 2025.
There were -47,870 permanent and long-term departures, equating to a net increase in long-term residents of +111,840 in a single month (also an all-time high).
So much for the government "bringing the numbers down quite considerably."
Of course, there is a seasonal element to this given University term times, but even smoothing the figures out on a 3-month moving average (h/t Dr Alex Joiner of IFM Investors) shows net long-term movements hitting an all-time high of +94,980 per month.
The latest figures suggested that the stock of international students has almost certainly crested to a new high in the first quarter of this year at somewhere north of 800,000.
Let anybody needs reminding this comes at a time when rental vacancy rates are already at chronically low levels, and local governments have been busily banning permanent tent villages over the past few weeks in southeast Queensland, and ushering the homeless on.
Asking rents for houses rose by a further +3.3 per cent over the past quarter, according to
SQM Research data:
Deflationary shock
Secondly, Australia potentially faces a deflationary shock, which markets expect to push down interest rates to a stimulatory setting.
Although US tariffs could initially increase goods prices in America, 5-year inflation expectations show that overall the tariffs are set to be disinflationary or deflationary for the global economy.
As China seeks new markets for its excess goods, Australia may in time be flooded with cheaper cars, toys, mobile phones, electronics, and other consumer goods.
Oil prices have also crashed by nearly 30 per cent over the past year, which will bring down petrol and then manufacturing costs.
Australia's futures markets are pricing for around five interest rate cuts over the year ahead.
Bond yields have dived in sympathy, with Australia's 3-year government bond yield trading at under 3½ per cent, and banks will now be cutting their fixed mortgage rates accordingly.
In fact, the below moves from one of the major banks were announced yesterday, with cuts across the board:
I doubt many borrowers will be fixing at this stage in the cycle, but the direction of travel is clear.
There is one factor pulling in the other direction, being the regulatory requirement for banks to stress-test new borrowers with a record 3 percentage points lending assessment buffer as a guardrail against higher interest rates (a setting which itself is partly responsible for the lack of significant new housing development).
Across Greater Sydney through this cycle to date, only
the Parramatta LGA has shown any kind of meaningful increase in new dwelling units approved.
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