Housing Market Correction

Chief Economists View 

The spectacular reversal of the Australian housing market over 2018 has led many commentators to revise down their house price forecasts, with some calling for a market crash. Once a place of joy, the housing market is now a place of fear and I, for one, would not want to be the compere of a renovation reality show now. But exactly how fearful should we be. Let’s start by looking at the data. Across Australia, the peak-to-trough fall in dwelling values (houses and units) to date is a mere 2.7% (according to CoreLogic). In fact, Brisbane, Hobart and Canberra are still at their peaks, while Adelaide prices are down just 0.4%. The variation in the declining markets is large. Most attention is focused on our two biggest state capital cities, Melbourne and Sydney, which are down by 4.4% and 6.2%, respectively.

These price declines pale in comparison to Perth (-13.2%) and Darwin (-22.1%). But if you really want to see a house price crash, you need to look to regional WA, where the end of the mining boom has seen house prices fall by a whopping 31.8%. In comparison, the rest of Australia’s regional housing markets have gotten off lightly. Mining-effected regional Queensland is the next worst, but down just 5.4%, regional SA is down 4.3%, regional NT by 4.2%, regional NSW is down 1.3%, regional Vic by 0.2% and regional Tasmania is still at its peak.

Turning back to Australian averages, the most expensive houses have taken the biggest price hit. Dwellings with values in the top quartile have fallen by 4.8%, compared to a miniscule fall of 0.1% for the middle 50% and a rise of 1.1% for the bottom quartile. Again, the geographical distribution is mixed. The fall in top-end housing is dominated by Sydney and Melbourne, where prices of top-quartile dwellings fell by 8.4% and 6.7%, respectively. Smaller falls have been recorded in Perth (-2.6%) and Darwin (-1.0%), but top-quartile dwelling values have lifted across the remaining capital cities, with Brisbane up by 0.5%, Adelaide by 0.6%, Canberra up 1.8% and Hobart the star of the top-end market up by 7.2%.

But the correction in the Australian housing market is not yet over. How much further can house prices fall? Let’s start with the historical record. Based on ABS and CoreLogic data dating back to the start of the 1980s, there have been seven corrections in the housing market for an average fall per episode of 4.2%. The largest decline in dwelling prices was during the GFC (from February 2008 to January 2009), where prices fell by 7.9%. The only other episode worse than the average was between June 2010 to February 2012, when prices fell by 6.5%. Falls in the Australian housing market are a far cry from those in countries such as the US, Ireland, Spain and Japan which have witnessed falls of >30%. So, apart from our love affair with housing, what has kept the Australian housing market from falling as sharply as other countries, and can we rely on those factors providing support in the current downturn?

Historically, Australian house price falls have been typical late-cycle phenomena, where corrections have been precipitated by a sharp rise in the cash rate by the RBA in response to rising inflation and an overheated economy. The corrections have deepened as the unemployment rate climbed and real household disposable incomes fell. However, having moved the cash rate higher, the RBA was able to respond to the decline in economic conditions by cutting the cash rate and in the process, provide support to the housing market. This was the case in the two significant Australian housing market corrections of 2008-09, where the RBA cut the cash rate from 7.25% to 3.00% and 2010-12, where rates were cut from 4.75% to 3.00%.

But in this current correction, the RBA has already used up its monetary policy ammunition with the cash rate at an all-time low of 1.5%. So, what will prevent Australia from experiencing a double-digit decline in dwelling values this time? Two things. First, the fall in house prices this time has not been in response to late-cycle rate hikes by the RBA. In fact, underlying inflation is below the RBA’s target range and the cash rate is at its historical low point.

The trigger for the current correction was macroprudential policy by APRA designed to ward off a bubble that was forming in response to extremely low mortgage rates and ease of borrowing. In the event of a disorderly correction, APRA can ease the regulatory environment allowing the influence of the low interest rate environment to once again drive demand in the market. Second, employment growth is strong and the unemployment rate is low and falling. Loan defaults and forced sales, the catalysts for a crash, are most likely when the unemployment rate is high and rising. While these two factors will save the market from a double-digit correction, they may not save the market from its largest decline in over forty years.

Table 1: Financial market movements, 18 - 25 October 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,705.6

-2.3%

US

3.12%

-6.2 bps

US Dollar Index (DXY)

96.68

0.8%

Nikkei 225

21,268.7

-6.1%

Japan

0.12%

-3.5 bps

USD-JPY

112.42

0.2%

FTSE 100

7,004.1

-0.3%

UK

1.44%

-9.7 bps

GBP-USD

1.282

-1.5%

DAX

11,307.1

-2.4%

Germany

0.40%

-1.8 bps

EUR-USD

1.138

-0.7%

S&P/ASX 200

5,664.1

-4.7%

Australia

2.61%

-11.5 bps

AUD-USD

0.708

-0.3%

Source: Bloomberg

 

 

For economic update by region, click here.

About QIC

Investment Capabilities

Knowledge Centre

Latest News

About QIC