House prices - from boom to crash?

Mon, 26 May 2014  |  

The RPData house price series shows that house prices have tumbled a quite remarkable 1.7 per cent so far in May. This follows a softish 0.3 per cent rise in April and it just might be signaling something starting to go amiss in the $5 trillion housing market.

To be sure, the RPData house price series are not seasonally adjusted, they are produced on transactions from several months ago and no doubt there are other foibles in the series, but they are often used by the RBA to judge house price trends and for that reason alone, they are worthy of mention.

It was always likely that house prices would be softening after the strong gains between late 2012 and early 2014. It is just that the catalyst for the slowing - higher interest rates – has not been the cause.

In clutching at reasons for the fall in house prices, here are a few possibilities:

  • The high prices themselves and less extreme dwelling rents are driving potential buyers away, which is slicing back on demand.
  • Falling real wages, which is eating away at disposable income, which is undermining demand.
  • The jolt to confidence from the government trash talking the economy and exaggerating the budget "crisis" may have had impact on buyer demand.
  • New supply coming onto the market from the lift in dwelling construction is a possible factor – it is early days to be sure, but dwelling approvals have been trending higher for two years.
  • Of course, it could just be statistical noise and the series will show a rebound in house prices in the months ahead. Or it is seasonal, with prices edging off a bit a month or two ago and this will reverse soon.

Whatever the issue, house prices require close scrutiny. Unrelenting house price inflation is not good for an economy but worse is a house price crash. We are nowhere near that, of course, and I am strongly of the view that Australian house prices are simply expensive but nowhere near bubble territory. Some moderation in house price growth or even small falls are a good thing. We might be seeing that now and not much else.

But in a classic 'be careful what you wish for', if house prices are in fact falling and there are more substantial falls ahead, the damage to household wealth, consumer sentiment and bank balance sheets could be a worst-case nightmare.

Just ask the Irish, Spanish, Americans, Japanese and British about the effect of sharp house price falls on their economies.

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