April 9, 2019

Australian Markets Weekly: How bad is the downturn in house prices?

The Weekly explores falling house prices – how do they compare with history and international experience?


For the full picture, download the report: Australian Markets Weekly 8 April 2019


In this issue we cover:

  • Australia: RBA Deputy Governor Debelle speaks on “The state of the economy” on Wednesday. The speech could prove important as he will have the chance to provide colour on the decision by the RBA to tweak the policy paragraph of its April interest rate announcement (the RBA said, “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”). Recent data have been positive, but we interpreted this tweak as a step toward considering reducing interest rates, with the RBA likely to downgrade its outlook in May (we expect the first cut in July, but with the risk of an earlier move). Data-wise, home loan approvals are unlikely to have much influence on the RBA’s view, where we expect a short-lived bounce in February. Housing will feature more heavily in the RBA’s Financial Stability Review on Friday, where we think the RBA will show more concern about the ongoing decline in construction and prices.​
  • As for politics, the PM sat tight over the weekend, with 18 May now the favoured option for the poll given it is the last date for a traditional house/half-senate election (the Electoral Commission has previously said that a half-senate election must be held by 18 May).​
  • International: The US CPI and FOMC Minutes are on Wednesday. Inflation is likely to remain muted, allowing the Fed to be patient. The minutes should provide detail on the Fed’s balance sheet and whether the risks around the Fed’s pencilling in of a hike in 2020 (a rate cut is now largely priced by the end of 2019). In Europe, the ECB meets on Wednesday and there have been reports that President Draghi would like to push out forward guidance and discuss a tiered deposit rate for banks.
  • Analysis – Falling house prices – how do they compare with history and international experience? ​
  • Capital city house prices have been falling for over a year now and are now 8% below their 2017 peak, which is unusual considering interest rates and unemployment are both low. Placing this in perspective, it is the largest decline in the post-WW2 period, although it has to be stressed that there was an enormous increase in prices over this time.​
  • Real house price declines are more common and the 11% decline to date is the fourth-largest decline in the post-WW2 period. While this fall is still large relative to history, it is modest by international experience, where the average decline in real prices in other advanced economies post the global financial crisis was 20%.​
  • Net housing worth – ie. housing assets less housing debt – drives the trend in household wealth with housing accounting for about half of total wealth. Real net housing worth is 12% lower to date, almost matching the 13% decline seen in the early 1990s recession when unemployment peaked at 11%. Further declines seem likely given tighter credit conditions and we think falling wealth will have a more noticeable effect on consumer spending given the size of the shock to balance sheets and with no offset from weak growth in household income.

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