No matter which way you look at it – be it from an historical perspective locally or compared to declines seen offshore during the global financial crisis — there’s now little doubt that the downturn in Australian home prices is getting pretty big.
It’s now one of the largest on record in Australia, only surpassed by a handful of periods in the late 1800s and the first half of the 20th century.
While the declines have not been uniform in nature, including in some specific markets where prices have not actually fallen at all, it’s now safe to call this national downturn the largest in modern history.
These excellent charts from the National Australia Bank show just how large it’s been compared to periods in the past, both from a domestic and international perspective.
At 8%, the average capital city price decline has only been surpassed on six separate occasions in Australia since the late 19th century.
Including the impact of inflation, at 11%, the downturn is also the ninth-largest on record. The lower ranking in real, inflation-adjusted terms, reflects that inflation is now far lower than in periods in the past.
Even compared to some of the price falls seen during the global financial crisis in offshore markets, the current decline in real capital city home prices is notable, exceeding or approaching the same scale seen in many parts of the world during this period.
Even forgiving that Australian capital city prices have risen a long way over the past couple of decades, with this downturn starting from the highest level on record, it’s still getting up there in terms of duration and size.
And it’s now having a material impact on household wealth levels.
According to the NAB, given the family home is the largest store of wealth for most households, the decline in home prices, coupled with weakness in Australian stocks late in the year, net household wealth likely fell by 4% in 2018 in real, inflation-adjusted terms.
It also estimates that net housing wealth — the value of homes less mortgage debt — has fallen 12% in real terms from the record peak seen at the end of 2017, including a 2.5% decline in the first quarter of this year when price declines were particularly acute in Sydney, Melbourne and Perth.
The decline in housing wealth, according to the NAB, is now the second-largest on record in the past half century or so, only surpassed by the 13% drop seen in the early 1990s, when Australia last fell into recession.
Given many suspect the downturn will last for some time yet, largely reflecting the impact of tighter lending standards and a sharp lift in new housing supply in many Australian east coast markets, it’s little wonder why pessimism towards the outlook for household spending, and the broader Australian economy, is elevated at present.
Australia’s economy slowed sharply in 2018, growing at an annualised pace of around 1% in the second half of the year, around four-times slower than in the first six months of the year. Much of the deceleration reflected weaker household spending, the largest part of the economy at around 55%.
While there have been some encouraging signs in some select data series recently, including a surprise jump in retail sales in February, the broader evidence suggests the economic slowdown continued in the first three months of the year.
Adding to unease, in many periods in the past, both at home and abroad, when home prices have fallen by a similar amount to what’s been seen recently it’s often resulted in an economic downturn.
While the NAB isn’t expecting such an outcome, it expects the housing-led spending slowdown will keep Australian economic growth sluggish in the year ahead.
“Wealth effects on spending are likely to be more important in current circumstances given the size of the decline in house prices and since there is no offset from household income, which continues to post only weak growth,” said Kieran Davies, Economist at the NAB.
“This suggests to us that consumer spending is likely to remain weak, underpinning an outlook of sluggish annual GDP growth in the low 2% region.”
Other economists have also warned about the prospect of a prolonged downturn.
Late last year, Capital Economics said the downturn could see total housing wealth decline by $800 billion over the next few years
The group said the decline in housing wealth would likely drag on household spending, counteracting a continued improvement in Australian labour market conditions.
“We don’t think the wealth effect is dead or that households will be able to shrug it off,” economics at the group said.
“We estimate that the declining wealth effect will subtract 0.5 percentage points off annual consumption growth each year, or 0.3 percentage points from annual GDP growth per year.”
Separately, economist at UBS also warned that persistent weakness in the housing market could lead to an increase in household savings, seeing sluggish growth in spending levels maintained as families save more and spend less at a time when household incomes growth is already weak.
While few economists, especially from established financial institutions, believe the housing downturn will lead to an economic downturn in Australia, many believe weak household spending, and hence the likelihood of continued sluggish economic growth, will eventually see unemployment start to drift higher as hiring levels slow, making it harder for the RBA to lift underlying inflation back to within its 2-3% target.
Inflation is already very weak and that’s unlikely to change if unemployment starts to rise given it may start to put renewed downward pressure on wages growth which is already low compared to periods in the past.
Although some retain faith that strong hiring will continue, helping to lower unemployment further, that view is quickly becoming the minority. Financial markets still remain close to fully priced for the RBA to cut Australia’s cash rate to 1% by the middle of next year.
Many mainstream economists don’t even think it will take that long for the economy to spur the RBA into action, forecasting not one but two 25 basis point cuts to the cash rate before the year is out.
At this point the RBA is still retaining the view that “strong” labour market conditions will help to achieve its forecasts for lower unemployment and faster inflation in the years ahead. However, it abandoned its mild tightening bias on the outlook for the cash rate, implying that the next was likely to be higher, in February this year, suggesting that the risks for the next move were more evenly balanced.
Earlier this month, the RBA indicated that it would “continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”.
Many perceived this line — new in the bank’s April monetary policy statement — as a sign the bank may be moving closer to cutting the cash rate for the first time since August 2016.
The bank also acknowledged that household spending is being impacted by continued weakness in real household disposable income and downturn in the housing market.