House Prices - why doom and gloom is a misplaced sentiment

Several months ago an article on house prices appeared in a high circulation New South Wales daily newspaper. In this article a prominent media commentator (not me!) noted that if there was a recession here in Australia then house prices in Sydney could fall by as much as 25 to 30 per cent. Note the use of the terms ‘if’, ‘could’, ‘as much as’.

I received my first phone call regarding this article just after 6:30am on the day in question. By this time the ‘ifs’ and ‘coulds’ for Sydney had already become a more definitive ‘are going to’ and Sydney had already transformed into the whole of Australia . This was to become a common stretch over the course of the day as I frequently fielded calls asking what I thought about this seemingly inevitable house price crash that was about to inflict itself upon the Australian landscape.

Such is the lure of potential negative news regarding a subject dear to so many Australians hearts, not to mention economic well-being, the value of their own home.

The prospect of a sustained fall in house prices across Australia gained further currency with the release of March 2008 quarter data which showed some falls in median house prices over the quarter, including for parts of Tasmania (for example Inner Hobart and the North-West region of the state).

What didn’t seem to rate much of a mention in the reporting of these house price updates is that by and large, median house prices remained higher in the first quarter this year than they were a year earlier. This was certainly the case in Tasmania where the annual growth in median house prices was, at a minimum, 5.3 per cent (Inner Hobart) and at a maximum 15.3 per cent (North West Centres). 

It is also the case that the mix of people putting homes up for sale was not quite the same at the beginning of this year as it was at the beginning of 2007. Early last year a large proportion of home sale listing traffic was being driven by owner occupiers. In 2008 a far larger proportion of listing traffic is stemming from investors, both retirees stuck with large share market losses and people who have come off fixed rate loans to face a jump in mortgage repayments that can total thousands of dollars a year.

At the end of the day though, over the last decade house prices in Australia have generally increased three-fold and one quarter worth of (modest) decline that has been over-hyped doesn’t equate to major chunks of equity being wiped from the average value of a home. This is the case in Tasmania , and everywhere else in Australia for that matter with the exception of parts of Western Sydney – a unique market - where the wipe-out began years before the first quarter of 2008.

There is no doubt that aggressive interest rate rises and the sharp increase in the cost of living have taken the sting out of house price growth following a notable resurgence in growth over much of 2007. Sentiment towards buying a home has been falling for some time.

However, labour markets remain quite strong. The unemployment rate for Tasmania averaged 4.8 per cent over the first five months of 2008, 0.5 percentage points lower than the average rate over the first five months of last year. The unemployment rate was steady to lower in all regions of the state with the exception of the Northern region where there was a mild increase. Business investment in Tasmania also remains healthy.

It may well be, in fact it is quite likely, that in a more difficult economic climate over the next year or two there will be some increase in unemployment rates and a loss of momentum in business investment. It is nevertheless highly unlikely that economic factors will deteriorate to such an extent that we find ourselves on the brink of recession.

That’s the key point, house prices don’t just blow over like a rickety sign in the wind, there would need to be a substantial deterioration in economic conditions. In the absence of such an outcome, a few quarters of weakening house prices signals some toughening in economic times and an end to a house price boom that lasted for at least a decade, it doesn’t signal that house prices are about to free-fall off a cliff, carrying all and sundry with them.