House prices - down, down, deeper and down

Fri, 16 May 2014  |  

After a tepid 0.3 per cent rise in April, house prices have fallen a somewhat large 0.7 per cent in the first 16 days of May, according to the daily RPData house price series.

While the numbers are clearly choppy, volatile and are not seasonally adjusted (the autumn blues?), we just might be seeing the jolt to consumer sentiment and impaired affordability starting to bite what had been a strong rise in prices.

For now, a moderate house price fall of, say, 5 per cent or so would be small beer. Even with the recent house price pick up, which was looking uncomfortably large, the total change in house prices since 2010 has been a little over 6 per cent. This is not a large change.

That said, the perils of falling house prices for the banking sector and the economy more generally are clear. One only has to look at the experience of Ireland, the US, the UK and Spain, to name a few, to see how a drop in house prices can smash the economy into recession.

It is important to emphasise that a few weeks or even months of moderate house price falls is neither here nor there, but if we start to see house price falls running over 5 or 6 months and the cumulative falls gain momentum and start to get toward 10 per cent, there would be a problem that may be hard to arrest.

Whatever the individual policy merits of the budget, the atmosphere it has created is one of caution and apprehension. The Roy Morgan ANZ weekly consumer confidence measure has fallen more than 10 per cent in just a few weeks. Given there are no hints of a change in interest rates, the stock market and Aussie dollars have been broadly flat, the only explanation for this free fall in confidence is the budget rhetoric and now implementation of confidence sapping measures.

History shows that low levels of sentiment lead to cautious consumer behaviour which shows up in higher savings, deleveraging and slower growth in spending.

Australia has not had a recession for 23 years and the prospects of one are still remote. But if what we are seeing in house prices is the start of a move towards sharper and sustained falls, the banks will be smashed, the still heavily indebted household sector would be bruised and the chances of recession or something that feels like a recession will increase sharply.

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