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Will the housing downturn be over sooner than we think?

Investors in the US have just started behaving very differently.

The share market has seen a strong rally, with the S&P500 increasing by 15 per cent since its 2022 low in mid-June.

A major component in this change in sentiment has been lower than expected inflation in July.

While still high at 8.5 per cent, it was lower than the June rate of 9.1 per cent.

Importantly, it was driven down by two things that directly impact Australia’s inflation rate – fuel prices and supply chain improvements.  

Unlike the US, we don’t yet have monthly inflation numbers, although the Australian Bureau of Statistics is currently working on this.

Our latest inflation figure to come out was for June and although our price increases are not moving as quickly as the US, over the past seven weeks, there has been a noticeable decrease in petrol prices and supply chains seem to be moving a bit quicker.

This is being backed up with data.

Crude oil prices have fallen from the peak of almost $US120 per barrel to around $US90, a drop of 25 per cent.

The Baltic Dry Index, which measures the cost of shipping worldwide has dropped almost 80 per cent.

Given how significant fuel and supply chains were to our high inflation, this gives us an insight into how our high inflation may be over sooner than later. 

With inflation starting to pull back, so to does the need to raise interest rates.

In Australia, the ASX 30-day interbank cash rate futures are currently implying an interest rate peak of around 3.6 per cent mid-next year, with rates then coming back from around October.

Importantly, the expectation of how high the peak will be continues to come back – a few months ago, it was expected to be well over four per cent. 

With inflation drivers improving and markets feeling more confident about the outlook, it does look like the housing downturn may be over sooner than expected.

Clearance rates are already starting to look more positive, hitting a 12-week high over the weekend.

Our own analysis of active bidders at auction has shown that it hit rock bottom in July at 2.4 bidders per auction but has increased to 2.5 bidders in August.

Importantly, Sydney hit the bottom in June and has been steadily increasing since then.

Also positive has been the gap between highest prior offer and auction sale price – in Sydney in August, it increased to 10.6 per cent after declining to 8.9 per cent in July. 

Interest rate increases are unlikely to be over and there is very little chance that we will head back to record breaking house price growth any time soon.

However, the chances of a sustained downturn and giant declines in prices look to be steadily dissipating. 

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Nerida Conisbee

Nerida Conisbee is the Chief Economist at Ray White.