Reckless RBA Inflates Sydney’s Resurgent Property Bubble

australian real-estate development

Sydney’s property market is surging again after new figures revealed auction rates have crept above 80% in recent weeks. In an all too familiar tale, the uptick in clearances rates has come hot on the heels of the Reserve Bank’s latest interest rate cut.

Whatever reasons the RBA had for lowering rates earlier this month, the outcome was as predictable as it was inevitable. It appears that, once again, homeowners were the biggest beneficiaries of the central bank’s policymaking. But, as we’ve come to learn about Aussie real estate all too well, not all property markets are created equal.

Since cutting the cash rate by 0.25% on 2 August, homeowners in Sydney have reaped the bulk of the RBA’s goodwill.

On Saturday, 30 June, auction clearance rates in Sydney came in at 75.7%, with buyers snapping up three in four homes that weekend. While by no means a disappointing figure, it was still well down on the 84% from a year earlier.

In fact, it was something of a return to form for the harbour city. The last time auction clearances topped 80% in Sydney was back in April.

It’s striking, then, to see the impact the latest rate cut has had on demand for housing in Sydney.

Since 6 August, the clearance rate has nudged higher for the past three successive weekends. On 6 August, the clearance rate rose to a two-month high of 79.4%. On 13 August, that spiked to a 13-month high of 82.8%. And, just last weekend, that was bettered yet again, with the clearance rate topping 84.1%.

You’d be hard pressed to find a better recent example of the relationship between interest rates and auction clearance rates (and demand for housing). Despite regulatory pressures and stricter lending measures, banks clearly haven’t giving up on the goose that lays the golden eggs. The demand for home loans, and the banks’ willingness to lend, will only continue to drive up property prices in Sydney.

It should be noted, however, that the number of homes up for auction was well down on the previous week. There were just 492 homes on the auction block, compared to 723 the week prior.

If nothing else, though, it’s an interesting insight into mindset of homebuyers. There’s an element of ‘grab whatever you can’ about it all…and at whatever cost.

Median auction prices in Sydney topped $1.1 million on Saturday

Last week’s median auction price in Sydney reached an eye watering $1.175 million. That was up on the $1.02m from a week earlier.

Sydney’s strong performance also helped lift the national average.

According to CoreLogic, the national preliminary clearance rate rose slightly, to 76.6%, over the previous week.

Melbourne reported a clearance rate of 76.1% across 707 auctions. In Adelaide it was 66.2%. In Brisbane, just over half of the homes on auction were sold, coming in at 56.5%. And in Perth, just five of the 25 homes up for auction were sold.

The RBA tries and tries…and fails, again

The rise in housing demand (and week-on-week auction sales growth) isn’t exactly what the RBA would have wanted to see. Not if the bank is genuine about its claims of keeping housing unaffordability in check, anyway.

Regardless, the rate cut seems to have missed its intended mark. If the purpose was to put pressure on the Aussie dollar, it appears to have failed spectacularly.

Since the 2 August rate cut, the AUD has moved in an unexpected direction. In the week after the rate cut, it actually climbed two cents, to 77 against the US dollar. It has since retreated slightly, and is now trading at 76 US cents.

Part of the reason for this is that foreign capital inflows have risen to take advantage of attractive yields on the ASX. According to George Lucas, managing director at Instreet Investments:

Compared to the S&P 500, which yields about 2.3 per cent, the yield from the ASX 200 companies is attractive, resulting in foreign inflows and leading Australian companies being included in global yield ETFs listed in the US.

With the amount of debt in negative yield now at a staggering $13 trillion, it is no wonder that the main driving force for equities will be the global hunt for yield.

And it’s not just equity yield that is attractive in Australia. The AAA-rated government bonds are producing significant yield when compared to negative yields.

In light of this, it’s hard to see how the RBA could justify another rate cut anytime soon. But the expectation remains that the bank will slash rates by 0.25% before December, a move that would set the cash rate at 1.25%.

Quite why it would do this, despite evidence showing the ineffectiveness of recent rate cuts, is anyone’s guess.

Perhaps we need not think too long and hard about it, though. While in Australia we talk about record low interest rates, across much of the developed world the discussion centres of negative interest rates (NIRP).

Yet if the RBA is determined to join other central banks in the ‘Club of NIRP’, everyday Australians without large assets will get the short end of the stick. They’ll not only find housing more unaffordable, but they’ll be stung by hidden inflation and rising household debt on the back of the credit expansion.

The big winners will remain the homeowners in select, high growth markets. Property prices in these cities will keep rising, even as other markets, like Perth, remain in a veritable depression.

None of this, though, will come as any surprise to The Daily Reckoning’s property expert, Phil Anderson.

Phil maintains that average national house prices will continue to boom over the next decade.

His 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s heading. He predicted the global property-led crash in 2008 years before it happened. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.

He was right on both accounts.

In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.

Mat Spasic,

Contributor, The Daily Reckoning


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