- Risks associated with Australia’s housing market are now higher than a year ago, according to CoreLogic.
- It says that while the risks are higher, that does not necessarily mean prices will tumble.
- A deterioration in labour market conditions, a global shock or a material rise in interest rates are the “most likely” catalysts to spark a house price crash.
No matter what indicator you look at, Australia’s housing market has softened over the past 12 months.
Prices nationwide have fallen 2% from September last year in average weighted terms, led primarily by declines in Sydney and Melbourne where values have fallen 5.6% and 3.5% respectively from their cyclical peaks.
Many suspect those trends will persist for some time yet with no shortage of forecasts predicting further price declines over the coming years.
The only real question many are now asking is just how large the falls will be? Some believe they’ll be significantly larger than others, perhaps as much as 40%.
Tim Lawless, Head of Research at CoreLogic, can understand why some forecasters are seemingly trying to outdo each other when it comes to the magnitude of expected price declines.
“Dwelling values are slipping lower nationally, mortgage rates are edging higher and mortgage arrears have moved off their record lows,” he says.
“All this against a backdrop of record high levels of household debt relative the ratio of disposable income, increasing levels of housing supply and rising domestic and global uncertainty.”
Along with the potential for further out-of-cycle mortgage rate increases arriving in the not too distant future, and potential changes to the tax treatment of housing ahead of the next Federal election, Lawless says the risks facing the housing market are now higher than they were a year ago.
However, while the risks are now elevated compared to periods seen in the past, does that mean Australian home prices could near-halve in the period ahead?
While he admits that forecasting the movement in asset values is challenging at the best of times, particularly given there’s so many unknowns right now, Lawless says there are still plenty of positives that point to the likelihood that this price correction may not be all that different to those seen in the past.
“It’s hard to see a scenario where Australian housing values could fall off a cliff,” he says.
“Even with mortgage rates edging higher, we are still in the lowest mortgage rate environment since the 1960s.
“Population growth remains strong and maintaining a consistent migration policy seems to have support from both sides of politics which will continue to support demand for housing… [and] labour markets are reasonably healthy with unemployment holding at 5.3% and likely to trend lower.”
So what kind of scenario could lead to a housing market crash?
Lawless says there are three, and all appear unlikely based on what he’s seeing at present.
“For [prices to fall off a cliff] we would need to see a material about-face in labour market conditions, a global shock or a material rise in interest rates,” he says.
While a global shock remains a small yet highly significant risk, and out of Australia’s control, policymakers at the Reserve Bank of Australia (RBA) have made it clear in recent commentary that while the next move in official interest rates is likely to be up, not down, it still sees no near-term catalyst to start that process early.
In the absence of a global shock or unexpected increase in official borrowing costs, that suggests the labour market will likely play a key role in determining whether this downturn turns into an outright crash.
As Lawless notes, labour market conditions are continuing to improve at present. Employment sits at record highs and unemployment at the lowest level in five years.
And even if the labour market cools a touch, as many leading indicators are now starting to suggest, Lawless says recent history suggests things will have to deteriorate substantially for it to lead to a potential crash.
“Even in Australian markets where values have been falling consistently for more than four years on the back of a material weakening in economic and demographic conditions, we haven’t seen values fall by anywhere near 40%,” he says.
“Perth dwelling values peaked in 2014 and have fallen by 12.6% and in Darwin where conditions have been even tougher, dwelling values are down 21.8%.”
While these markets are substantially smaller than Sydney and Melbourne, it suggests that for things to get gnarly in Australia’s property market, they’ll have to get gnarly in the jobs market first.
Clearly, having the ability to obtain and service a mortgage will undoubtedly play a large role in determining what will happen next.
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