Australian home prices have risen consistently over the last 20 years. With that in mind, it’s sometimes easy to forget that there have been bumps in the road despite the broad upward trend.
CoreLogic analyst Cameron Kusher’s latest Property Pulse report dissects the biggest price falls in major Australian real estate markets since the financial crisis in 2008.
It’s worth noting given the recent evidence that home prices are starting to cool, with Sydney and Melbourne markets falling in May.
Looking at the growth in Australian real estate since 1997, Kusher said that house prices have increased by 346.4% over the last 20 years.
This chart shows the annual changes in prices across all capital cities:
Despite a very strong rate of growth, the chart above highlights two periods when the property market had a notable downturn.
The first was in 2008 in the fall-out from the global financial crisis (GFC), when house prices had single-digit falls in percentage terms, subsequently halted by an aggressive fiscal and monetary response.
“Stimulus measures in the form of aggressive interest rate cuts along with cash handouts and boosts to first home buyer’s grants proved enough to spur demand and turnaround the decline in values,” Kushner said.
The second major fall took place between 2010 and 2012. In that case, home prices in multiple states had double-digit percentage declines, led by a 19.7% fall in Darwin.
According to Kushner, the falls in this period were caused by an unwinding of the post-GFC stimulus, as interest rates began to rise and first home buyer grants were reduced.
The turnaround was led largely by another change in monetary policy, when interest rates were reduced from a high of 4.75% in October 2011. The cash rate has steadily declined in the subsequent six years to its current level of 1.5%.
“The impetus for previous declines has been around external economic shocks along with the stimulus of low interest rates and grants to first home buyers being removed,” Kushner said.
Although Australia isn’t currently experiencing an external shock event like the GFC, Kushner highlighted employment as a key concern.
“We are seeing the unemployment rate at similar levels to 2008/09 and historically high levels of underemployment,” he said.
Given the well-documented headwinds to the economy in 2017 from low wage growth, increased services costs and high household debt, the general consensus is that if interest rates are moving anywhere it’s most likely down.
For now though, the Reserve Bank is content to keep interest rates on hold while maintaining its growth forecast for the next couple of years at a little over 3%.
Instead, policy makers have put a recent focus on macro-prudential measures, led by banking regulator APRA’s move at the start of April to put a cap on the interest-only loans banks can issue.
APRA is also expected to release a paper at the end of June where it will define the requirements for the major banks’ capital position to remain “unquestionably strong”.
With auction rates slowing last week in Sydney and Melbourne markets, there’s some evidence to suggest the recent regulatory changes may be having an effect on house price growth.
According to Kushner though, a significant drop to match the falls of 2008/09 and 2010-12 would probably require a tightening of monetary policy, and that’s unlikely to be coming any time soon.
“Depending on how much mortgage rates are increased (noting that this is not happening due to the RBA) home owners should be aware that it could lead to a slowing or even some potential falls in dwelling values,” he said.
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