As noted by Bloomberg in an interview with AMP’s Shane Oliver, Australia’s housing market is priced in for a precipitous decline as lagging markets catch Aussie home prices in a downward spiral, which is seen as a primary risk for Australian growth looking forward.
“The positive feedback loop of recent years of rising prices bringing higher demand and further price gains has given way to a negative feedback loop of falling prices leading to reduced demand and further declines,” Oliver said of housing. “This could all be made worse if immigration levels are cut sharply.”
Sydney’s property market slump has reached a new milestone, with values falling further than the late 1980s when Australia was on the cusp of entering its last recession. The downturn in Australia’s most populous city is accelerating as tighter mortgage lending standards crimp the amount people can borrow and as nervous buyers sit on the sidelines.
Key downside factors for Australia:
- A direct detraction from economic growth as the housing construction cycle turns down of about 0.4 percentage point a year (the average it added during the construction boom).
- A negative wealth effect on consumer spending of around 1 percent per annum. Oliver noted that rising housing wealth had helped drive growth in consumer spending in Sydney and Melbourne as households cut the amount they saved. This is now likely to go into reverse, detracting around 0.6 percentage point from GDP growth.
- Taken together, he estimated these factors could detract 1-1.2 percentage points from GDP growth over the next year