‘I would be looking to exit the market’: Joye

Futures markets have signalled multiple RBA rate hikes over the coming years, suggesting the “overvalued” property market is in for a “reckoning”, according to a leading economist and fund manager.

Speaking on the Smart Property Investment Show podcast last week, Goldman Sachs and RBA alumni Christopher Joye explained how the future’s exchange paints an interesting picture of what could happen to the cash rate over the next few years.

According to Mr Joye, the three-year bond rate is the financial market’s best guess of where the RBA cash rate will be in the next three years.

“If I thought that I was going to get a substantial increase of interest rates over the next three years, I probably wouldn't be buying,” he said.

“I probably would be looking to defer that purchase, and pick up property when prices are falling, because prices will fall significantly if rates increase significantly. That's going to be your best proxy, your best pulse for global markets.”

Mr Joye explained that the 10-year government bond yield in Australia is the market's best guess of where the RBA cash rate will be over the next decade.

“A few months ago, that 10-year rate was down around 1.7 per cent. The RBA cash rate right now is at 1.5 per cent. What that means is, the market was saying, ‘We're not going to have any rate hikes for the next 10 years’,” he explained.

However, with major political changes in recent months including the election of Donald Trump as the next President of the United States, the domestic 10-year bond yield has surged.

“Suddenly, it's jumped up to 2.7 per cent, so the market's saying, ‘Gee whiz, we're going to get more than a percentage point or more than four RBA rate hikes – standard rate hikes, 25 basis point rate hikes – over the next year’,” he explained.

If this were to play out, then property prices – which Mr Joye believes are 25 per cent overvalued in Sydney and Melbourne – could experience a sharp correction.

“Brisbane, Adelaide and Perth are very different. Perth probably looks cheap. I know people who are moving to Perth to buy property and trade out of the Sydney market. They're making that switch, which makes a lot of sense if you can do it,” he said.

“If prices fall 15 to 25 per cent, there's going to be a little bit of mayhem. Housing markets tend to be like a super tank. Once it moves in that direction, it tends to move in that direction for a couple of years, at least. It's not like prices fall overnight, but they'll continue falling for a long time.”

This may sound bearish, but it does present some good opportunities for patient property investors.

“I would be looking to exit the market over the next one to two years before the first hike starts,” Mr Joye said. “Obviously, if everyone acts on this advice then this could become a self-fulfilling prophecy. I think you'll get tremendous opportunities. It'll take some time. You've got to be patient, you've got to wait for the rate hikes to fully flow through to capitalise on the valuation change, when prices do fall 10 per cent to 25 per cent.”

Over the longer term, Mr Joye says he is “actually very bullish” on housing, with strong fundamentals in the Australian economy suggesting that residential property will continue to thrive over the next few decades.

“There's strong population growth, strong immigration. I think China and India are the biggest sources of new migrants to Australia now. The RBA will be raising rates because of economic strengths, not weakness,” he said.

“The share market fell 50 per cent in 2008, but we didn't all get rid of our equities. People still held equity exposures. Like all markets, the resi market is well overdue for a little bit of a reckoning, but it doesn't mean it's not a good asset class.”

[Related: ANZ boss confirms rates will rise out-of-cycle]

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