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Are falling house prices masking something more worrying?

For Australia as a whole, the fall is small, at just 0.2 per cent in the March quarter according to official data from the Australian Bureau of Statistics.

This nationwide picture masks something a little more worrying across a number of cities which are showing more significant price falls. This means some buyers are risking negative equity in their house, which means that the value of the mortgage is larger than the value of the property.

In Perth, where the unemployment rate has almost doubled over recent years, the ABS data show housing prices falling 4.8 per cent since the peak in the first half of 2014. Prices are now back to the level of early 2013 meaning that those who have bought a house in the last three years in Perth have either only just broken even – at best – or have lost money.

It is a similar situation in Darwin where house prices have dropped 5.9 per cent since the June quarter 2014 to be back at the same level first reached in the March quarter 2012. That’s four years or either zero growth or a loss.

The interesting aspect of the latest ABS data is the clear evident that house prices in Sydney are falling. In the December quarter 2015, they dropped 1.6 per cent and they edged a lower by a further 0.7 per cent in the March quarter. To be sure, this cumulative decline of 2.3 per cent in six months is small beer in the scheme of the massive run up in prices over the prior four years, but if this is the start of a trend, the consequences could be dire.

The little bit of good news would be that housing affordability would improve, which is a good thing. The bad news, which would overwhelm this effect, would be the destruction of already fragile consumer confidence, an escalation in bad debt levels as people risk walking away form their poorly performing housing asset and this would spills over the macro economy.

It is difficult to be sure whether this fall in house prices is the start of a long run trend. Low interest rates and still solid population growth are positive influences on house prices. Against that is the risk of a property glut as the result of the record boom in dwelling construction, a tightening in lending for investors and restrictions on foreign purchases.

For the sake of fairness and financial stability, some moderation in house prices would be desirable. A house price crash would spark a recession, in much the same way as it did in the US, UK, Ireland and Spain. The current fall in house prices is neither severe nor threatening to the economy.

For many years the doomsayers have been predicting a housing price crash citing high household debt levels as a catalyst. Such forecasts still look to be an exaggeration of the issues being faced in the economy but the trends in house prices in Perth and Darwin, and to a lesser extent in Sydney are emerging as a serious threat to the economy.