- Annual house price growth in Australia is currently 1.2%, well below the double-digit gains seen early last year.
There have been six national price downturns of 5% or more in real, inflation-adjusted terms in the past 45 years.
- There are plenty of headwinds facing prices right now, underscoring why policymakers in Australia need to show caution.
After a prolonged period of strength, Australia’s housing market is slowing down fast, led by renewed weakness in Sydney and Melbourne, the nation’s largest and most expensive housing markets.
With some commentators expecting further price declines in these cities in the period ahead, it suggests that annual price growth, currently running at just 1.2%, according to CoreLogic, could turn negative as early as this month.
For a property-obsessed country like Australia, the slowdown has created more than a little interest, especially among those who think that after such a strong run over the past decade, the price slowdown could turn quickly turn into something more sinister — a slump.
However, while there’s a chance that such a scenario could occur, small downturns in Australia’s housing market are not exactly new.
As seen in the chart below from Morgan Stanley, there have been six national price downturns of 5% or more in real, inflation-adjusted terms over the past 45 years, including two in the past decade.
It’s a gentle reminder that, as in any market, there’s a price cycle. And price pullbacks, in the vast majority of cases, are a sign of a healthy market, greatly reducing the odds of a damaging boom-bust cycle where long periods of uninterrupted gains are followed by an equally large crash.
For a housing market valued at just under $7 trillion, and the largest store of wealth for the vast majority of families, few would want to see such an outcome to play out in Australia.
However, while price cycles are nothing new, it’s understandable why some are feeling a little nervous about the current price slowdown.
With official interest rates already at the lowest level on record, there’s very little the Reserve Bank of Australia (RBA) can do to help lower borrowing costs further and bring forward demand, especially should the cost of money continue to increase in other parts of the world.
And with household debt to disposable income currently hovering at a record-high of just under 190%, it’s debatable just how much more debt households can take on to funnel into housing.
Throw in the prospect of further tightening in lending restrictions and potential changes to the tax treatment of housing, two factors that have influenced house prices in the past, along with reduced activity from foreign investors, and it underscores the headwinds facing prices, especially at a time when so much new supply is hitting the market.
However, while that suggests we’re unlikely to see a dramatic recovery in property prices for the foreseeable future, it also doesn’t mean the current slowdown will become something significantly worse.
One suspects that for such an outcome to take place, it would take another GFC-type event abroad or a fairly significant policy error from Australian policymakers, be it on the fiscal or monetary front.
While little can be done to control the former, it suggests policymakers closer to home will need to tread extra cautiously.