Over the past few months we have seen an increase in the number of articles and commentary discussing a weakening in Australia’s housing market. There was one article in particular, published by the Business Insider in early April which resulted in several interesting water-cooler discussions around our office. As a research house, we are regularly asked to share our thoughts on current market movements, and one question put to us recently is; after what has been a prolonged period of strength, will the Australian housing market take a nose-dive?
Now, jokes about economists aside, put simply, house prices rise… and house prices fall. While stating the obvious, this does not tell us much about what we might expect in the current cycle. We will get to that (in part two of the discussion), but first, let’s unpack a recently published Morgan Stanley chart, revealing a history of Australian housing downturns. This chart demonstrates that there have been six national price downturns of 5% or more in real, inflation-adjusted terms over the past 45 years, including two in the past decade. It is often said those who fail to understand the mistakes of the past are bound to repeat it. With that in mind, can a review of our housing history help us understand what to expect for our current housing cycle or the future?
Unpacking the Morgan Stanley Chart
Before diving in, it should be noted that the chart above uses aggregate data derived from our state capitals.
- In the low inflation/high growth 1960s, we see a period of persistent rises in house prices (and in commercial property) which then carries into the early 1970s boom and then a bust which was (for borrowers/investors and banks) softened by inflation# but which led to the complacency which 15 years later led to the late 1980s boom and bust in the property market (and the economy). (# inflation devalued debt and saved the banks from major write-offs on commercial property – however, it caused the Bank of Adelaide’s demise (forced take-over by ANZ) due to big losses on lending for high rise development in the boom-bust Gold Coast market.)
- The story in the 1970s and 1980s shows volatility in real prices. This is a product of the high inflation and high nominal interest rates, and with a lag, very high real interest rates. In a high inflation environment, a period of stagnation in house prices translates courtesy of high inflation into a fall in real terms. Then as the price falls below replacement, it is prone to catch up quickly. That is, volatility breeds volatility. Despite the volatility, the high real interest rates that emerged in the late 1970s and 1980s acted as a significant constraint on real prices in this period before the pressure valve was released in the late 1980s and prices surged. However, high real rates were less of a constraint on commercial property prices which rose much more significantly than house prices and then crashed very sharply in the early 1990s. (Lesson from these two decades – watch the commercial property market).
- In the low inflation period which emerged in the 1990s and 2000s, we observe far fewer periods of decline in prices. A factor here is the significant decline in interest rates which, in conjunction with other factors putting upward pressure on prices, meant an upward trend in prices in real terms which means less probability of falls. With low inflation, the stagnation in Sydney prices circa 2004 did not translate to big falls in real terms. On the other hand, the more recent falls in the Perth market – a market hit by the extremes of the resources boom/bust - are significant.
- Again, on 1990s and 2000s, the same upward trend in the US and European markets did not stop sizeable falls in those markets. While nothing like the US, the post-GFC period did produce some volatility in prices in Australia, a short period of falls then significant movements up, down and then up again in response to changes in interest rates.
If we go back to the 1890s (yes, 120+ years ago), there was the colossal land boom followed by an equally large bust, a period of euphoric and very irrational expectations. Centred in Melbourne, a bubble in commercial land prices formed, feeding into the residential property market. From 1887 to the peak in 1891, housing prices increased by 32 per cent, only to collapse by 31 per cent over the next half a decade. The bursting of this enormous land bubble resulted in the worst depression in recorded history. But, the extreme situation in that period is like a super-charged GFC event. In short, this period is nothing like the circumstances present, so pointing to it is not useful except to say that prices can fall.
In summary, history can tell us a lot however when looking at the current cycle, the aggregate can sometimes hide significant movements on a local level. In part two of this series, MacroPlan will continue the discussion by looking at historical movements in individual markets with a plan to answer the original question; after what has been a prolonged period of strength, will the Australian housing market take a nose-dive?
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MacroPlan regularly conduct research assignments on housing demand and supply and employ this understanding when delivering market assessments, economic impact reports and business case recommendations. Contact Dr Nigel Stapledon (one of Australia’s leading macro-economist and housing experts) to discuss your next research requirement, 02 9221 5211 or firstname.lastname@example.org.