Fidelity Warns of Spectacular Pop in Australia's Housing Market

Fidelity fund manager Mike Riddell has warned that Australia's housing market is at a breaking point, with house prices falling sharply in response to rising interest rates. The market, which Riddell described as "crazy" due to high property prices, has seen Sydney house prices drop about 9% since April. The Reserve Bank of Australia (RBA) has raised rates multiple times this year, from 3.6% in January to 4.6% today, with most hikes occurring by May.

Riddell noted that house prices typically lag behind mortgage rate changes by six to twelve months, meaning the recent price declines may not yet reflect the full impact of the rate hikes. He expressed confidence that house prices will continue to fall, potentially by another 10% or more in the coming year. The housing market's significant role in Australia's economy, accounting for about 25%, means these changes will have a substantial impact on central bank policy and government bond yields.

Despite the RBA's aggressive rate hikes, the market is not pricing in any interest rate cuts, with rates expected to remain around 5%. Riddell believes this is "completely wrong" and anticipates cuts in interest rates next year, especially if a crisis in the eurozone emerges. He has positioned his funds accordingly, holding a significant weighting in Australian government bonds, betting on a decline in interest rates.

The Australian housing market's struggles echo the crisis in China's property sector a few years ago, though not on the same scale. Riddell sees Australia as the "biggest risk position" in his funds and is confident that the trend of falling house prices will persist, potentially leading to economic trouble for the country.