Ray White Chief Economist
Rate rises may be over for now but asset prices are rising – is FOMO to blame? The RBA took a break this month and rates remained on hold. It is likely that slowing inflation was a key factor, in addition to the slowing economy. Despite this rate rises may not be over, with markets continuing to price in more increases for the year. While this is the case, prices across a range of assets including housing, shares and even bitcoin continue to rise. Given this is counter-intuitive in a situation where the cost of finance is so much more expensive and the potential for a recession is increasing, what is driving it?
For housing, there are a number of reasons. Part of it is population growth. Clearly showing up in rents, there are too few homes for the number of people that want to live in them. This is flowing through to pricing. In addition, there are fewer people putting their homes on the market and fewer homes being built.
While the supply side is a key to price rises, demand metrics are also looking more positive showing that buyers are back. The number of people actively bidding at auction has risen from an average of 2.2 bidders per auction in November last year to 2.9 bidders in June. Housing loan commitments increased by five per cent in May.
Why are buyers back, despite so many rate rises? It could be a fear of missing out. The best time to buy is the low of the market. Last year, we saw a lot of buyers watching and waiting for the housing market to crash, or for prices to come down substantially. The idea being that they could swoop in and grab a bargain. This belief of a significant fall in asset values didn’t just happen in the housing market. A similar trend played out in share markets and for more volatile asset classes such as cryptocurrencies.
Instead of a crash, we have seen some decent performance this year and it is likely that this is going to continue to drive more buyers into the market. Capital city house prices have risen by 5.1 per cent since the start of the year, Australian shares rose 9.4 per cent over the year and Bitcoin has risen 80 per cent since January. More recently, the NASDAQ Composite Index has had its best month since the 1980s. For some assets, buyers have not only missed the downturn but pricing is well above the previous peak of early last year.
What could change the direction of asset prices movements? Right now, house price growth appears firmly entrenched. The increase over the quarter is now at its highest level since the end of 2021. More rate rises, a rise in distressed listings and even recession may not be enough to lead to a decline in prices.