Australians like to reference the idea that house prices only ever go in one direction: up. For those lucky enough to have stepped on to the home ownership merry-go-round, they’ll wonder at how their home has appreciated so much over the past five, 10, or 20 or years. But for those still renting, they’ll most likely be lamenting how they may never get a foot in the door – both figuratively and literally.
Rapidly rising house prices is not a new phenomenon in the majority of cities in Australia. Over the 20 years from 1980 to 2000, average house prices increased by 225%, according to CoreLogic data. Over the following 20 years, they increased by another 200% and have notched up a further astounding 40% in just the last four years, thanks to ultra-low interest rates and the failure of supply to keep up with demand.
But house prices can also come down. This was particularly noticeable during the “recession we had to have” during the late 1980s and early 1990s, when a combination of high interest rates and prolonged high unemployment brought a sharp run-up in prices to a halt in April 1989. Prices fell 4% over the next 18 months and then moved sideways for a further year and a half.
Similarly, following the global financial crisis, house prices fell 5.6% between May 2010 and January 2012 and took a year and a half to return to the earlier high. There have been several other periods of falling house prices since then, and these have ramifications for both individuals and the broader economy.
This week’s CoreLogic home value index shows there are signs of weakening house prices in some parts of the country. Home prices in Melbourne, Canberra and Hobart were all below year-ago levels in November, and Sydney is heading in this direction.
This softening appears to be in response to increasing supply (with new listings reported as significantly higher), reduced demand (tighter credit, slowing population growth) as well as expectations that an interest rate cut is still some way off.
These conditions are likely to prevail into the new year, and there is the additional factor of enormous declines in affordability as wages have grown at less than half the pace of home prices since 2000. So, it seems that further falls in house prices could well be seen in most, if not all, states and territories for at least the first half of 2025 and possibly much longer if prevailing economic conditions were to turn further south.
While would-be first homeowners may be eyeing this softness with some degree of optimism, it’s worth noting that lower house prices have some far-reaching consequences. Two particular aspects will be being closely monitored by the Reserve Bank of Australia: mortgage default rates and the so-called “wealth effect”.
Increasing mortgage default rates across the economy, which affect financial system stability, are typically triggered by the coexistence of two key factors, or the so-called “double trigger”. The first is ability to pay, which may be triggered by rising unemployment, high debt-to-income levels and rising interest rates. The second trigger is falling house prices, which can lead to negative equity. That is, the size of the mortgage is bigger than the value of the home. This makes younger Australians with large loans relative to home value particularly vulnerable. However, compared with the late 1980s, when you could get a mortgage that was worth more than the value of your home, today’s lending standards are much tighter. Further, the unemployment rate is expected to rise only very modestly in 2025. This means our already low default rates are not likely to be at risk across the system as a whole in 2025.
Of more interest to the RBA is the wealth effect. Studies show that falling house prices mean tighter wallets, although it’s not entirely clear either why or by how much. Add to this the fact that 10% – or just over $40bn – of self-managed super funds is invested in housing and that broadens the potential impact.
This matters a lot just now, as the RBA has said it’s uncertain about how consumer spending will pan out over the year ahead and what this means for inflation. If house prices soften further and more broadly, dampening consumers’ spending, then the case for an earlier interest rate cut increases. Boomers won’t relish the prospect of both lower home prices and interest rates, but there are many households, especially younger ones, who might. And it must be time they had a win – if only for a moment.
Nicki Hutley is an independent economist and councillor with the Climate Council
