Undoubtedly the single biggest driver for property prices over the course of 2020 and 2021 was the $350 billion quantitative easing program (QE). This had the effect of injecting $4 billion per week into the economy, pushing the interest rates down and driving asset prices upwards sharply despite tough economic conditions for many ordinary people.
We saw a 17% jump in the ASX 200 and a 22% increase in residential property prices nationally in what was a great year for investors.
On 1 February the RBA announced that the QE program would be coming to an end on the 10 February. It left the cash rate unchanged though, stating that a rate rise in 2022 was “highly unlikely”.
The ending of the QE program was largely due to the fact that official inflation (as measured by CPI) had risen faster than anticipated. Headline inflation was 3.5% (sitting above the RBA’s 2-3% target band). This was largely due to supply side shocks from the shipping crisis pushing up the cost of all containerised freight, higher petrol prices and input costs for the construction industry.
Our view is that a rate rise towards the end of the year is quite possible and as a forward looking indicator, this possibility has already been priced into asset markets as well.
So, what does the ending of the QE program and a possible rate rise mean for property prices?
In short not much.
One thing we often forget is that the RBA raises rates because the economy is strong, even a little too strong with asset prices getting out of hand and tight labour market conditions.
In December the unemployment rate declined to 4.2% (which is considered full employment) with the RBA expecting it to continue to fall below 4% though out the year ending at 3.75% by 2023. This should put some pressure on wages growth over the course of the year. Ultimately this will end up being felt in both the rental market and property prices.
Our view is that while 2022 is unlikely to offer the same pace of growth as 2021 the East Coast markets are still in the early stages of a macro uptrend. An analysis of past property cycles shows that in two out of the last three property cycles the bulk of the growth during bull runs actually occur as interest rates rise. The vast bulk of the price increases over the course of this cycle have yet to come.
