According to CoreLogic data dating back to 1980, Australian home values in the combined capital cities have never fallen more than 11%.
The current downturn in the housing market is plotted below (in black) against previous episodes and shows that home values are falling at the fastest rate ever, but only about halfway through the record drop between 2017-19:
The steepness of this price correction makes sense, as the Reserve Bank of Australia (RBA) has raised its official spot interest rate (OCR) by an extraordinary 2.25% since May — the steepest rise in history.
The aggressiveness of the RBA’s monetary tightening has prompted Jo Masters – chief economist at Barrenjoey – to forecast a record 16% dip from peak to trough in national home values, with prices in Sydney set to fall 25%:
Ms Masters said Monday that the central bank will trigger a recession if it raises interest rates as aggressively as the markets expect… [They] expects the spot rate to reach 3.3 percent by the end of the year before peaking at 3.9 percent in April next year…
Barrenjoey expects the RBA to stop raising rates once the spot rate hits 2.85 percent, well below consensus estimates and just 0.5 percentage points above current levels.
Ms Masters said a 2.85 per cent spot rate was consistent with a 25 per cent drop in prices in the Sydney property market with a ‘highly leveraged’ property market and a 16 per cent drop in nationwide values.
“It will be the largest and longest house price correction in modern history…
Real estate prices would fall another 3 to 5 percent if the RBA raised rates in line with market expectations, Barrenjoey estimates.
“I think one of the biggest lessons for economists from the pandemic was how powerful interest rates are for the housing market”…
Jo Masters’ predictions look reasonable.
This month’s monetary policy statement from the RBA noted that: The board expects to raise interest rates further in the coming months.
As there is a two to three month lag between interest rate hikes and their impact on mortgage holders and the economy, this suggests that Australian home values will continue to fall sharply.
How far home prices will fall ultimately depends on whether the RBA halts the tightening early — as predicted by Jo Masters, CBA, AMP and NAB — or tightens it harder in line with bond market expectations.
Either way, Australia is facing the biggest house price drop in modern history and should easily overshadow the 2017-19 installment.