Australia's housing downturn could turn into the 'longest and deepest in modern history'

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  • Australian home prices have fallen 3% from their peak, a comparatively mild downturn compared to downturns seen in the past.
  • Capital Economics doesn’t think it will end anytime soon, suggesting it has the potential to be the “longest and deepest in Australia’s modern history”.
  • It doesn’t believe the downturn will lead to an Australian recession, although it does think it will limit the economy’s ability to grow at above-trend levels.

Australian home prices fell for an 11th consecutive month in August, led by declines in most capital cities, and regional areas, according to CoreLogic.

However, while prices have been consistently falling, at 2%, the decline in the group’s hedonic home value index over the past year has been smaller than those witnessed in the past, at least so far.

And given prices nationwide fell by 0.3% last month in average weighted terms, just half the pace seen in July, it suggests that rather than accelerating, the declines are becoming smaller.

Before seasonality is taken into account, that is.

According to analysis from Capital Economics, rather than indicating the pace of declines has slowed, today’s data suggests they fell at the same pace seen in July.

CoreLogic

“After seasonally adjusting the 0.4% decline in house prices in August on the eight capital cities measure to take into account the normal improvement in price trends ahead of the spring selling season, prices fell by 0.6%,” said Paul Dales, Chief Australia and New Zealand Economist at Capital Economics.

“As that was the same as the 0.6% decline in July, there has been no let-up in the pace at which prices are falling.”

So even though prices fell at a slower pace in nominal terms last month, given seasonal trends seen in the past, the decline was still large when adjusted to historic patterns.

Particularly in Sydney and Melbourne, as Dales explains.

“In Sydney, the 0.3% drop in prices doesn’t look too bad, but after seasonal adjustment it translates into a 0.9% fall. That’s the biggest in 10 years. Prices in Sydney have fallen by 6.2% from their peak and by an annualised 7.9% in the past three months,” Dales says.

“Although seasonally adjusted prices fell by a smaller 0.7% in Melbourne and are only 2.9% below their peak, the downward momentum in Melbourne is worse as prices are falling at a three-month annualised rate of 8.5%.”

Based on the price movements seen in Australia’s remaining capital cities last month, falling in six of eight after seasonal adjustments, Dales says the weakness is “spreading throughout Australia”.

“It might not be long before there’s a clean sweep with Adelaide and Canberra following suit,” he says.

Whether they join the national downdraft or not, Dales says the 3% decline in Australia’s median home price from the cyclical peak last year has the potential to be the longest and deepest in Australia’s modern history.

“Although this downturn has already lasted longer than the 12-month average of the seven previous downturns since 1980, the 3% fall in prices is the smallest on record,” he says.

“But with the full effect of the tightening in credit criteria and recent hikes in mortgage rates yet to be felt, we suspect this downturn will end up being both the longest and deepest with prices falling by 12% over four years.”

The chart below from Capital Economics shows how long and far it expects this downturn to be compared to those seen in Australia in the past. It also compares its forecast to what happened in the United States following its housing bust in the late 2000s, something that sparked the onset of the GFC.

Capital Economics

Should Capital Economic’s forecast prove correct, could it lead to a similar scenario in Australia, snapping the record run of 26.5 years without the economy falling into recession?

Dales doesn’t think so, but he thinks it will lead to economic growth remaining lacklustre in the years ahead.

“Overall, a 12% fall in house prices spread over four years is unlikely to cause too many problems,” he says.

“But by prompting households to spend more cautiously, it will probably contribute to GDP growth being closer to 2.5% over the next few years rather than the rates of 3.0% or more the RBA is banking on.”

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