Domain enters full blown house price panic

It’s taken a while but it’s finally here. Domain entered a full blow house price panic on the weekend with wall-to-wall coverage. We begin at the AFR:

An exclusive analysis by CoreLogic for AFR Weekend shows the potential scale of the downturn, which could, nominally, leave the buyers involved in 830,000 property sales in the two biggest cities under the water, if prices fall 25 per cent from peak to trough.

If the downturn in the two biggest capital cities tracks in line with some economists’ bearish forecasts of 25 per cent falls, property prices will wind back even further to levels last seen in Sydney in October 2014 and January 2015 in Melbourne and the effects will be felt far and wide.

…”That’s nearly 1 million people, which would be almost 10 per cent of households – it’s a significant number and that’s not including Perth or Darwin where property prices have also fallen,” AMP Capital chief economist Shane Oliver said.

Actually it is 2.1m people. And that is only those in negative equity. Everyone else with a house is also getting poorer (unless appropriately hedged), almost certainly pulling spending to repair their balance sheets too. Remember that housing is a $7tr market versus an economy of only $1.7tr.

The metro dailies were also full of doom and gloom. At the SMH:

Some of Sydney’s most marginal seats are facing property price falls of up to 15 per cent, turning the housing market into a major election issue amid fears values will continue to tumble.

A Sydney Morning Herald analysis of house prices by electorate – derived from CoreLogic data – shows the Liberal-held seats of Bennelong and Banks have experienced the steepest falls of the city’s electorates, tumbling by 14 per cent in the past 12 months.

…The housing market has become a political hurdle for Labor and the Coalition as both parties race to the May election grappling with how to handle falling prices and a slowing economy.

The story came with a nice little interactive graphic that could tell you exactly how much money you have lost so far. Exactly the same story with different data and depressing graphic was served up at The Age.

Another bull versus bear piece ran in both papers, heavily weighted towards the latter, though Mr IQ took the cake as usual:

“I’ve been waiting seven years for this market to return. This is my pay day,” says Nathan Birch, 33, who owns 187 properties across Sydney, Melbourne and elsewhere.

“Everyone is going to get scared. It’s like there is a fire in a big building and everyone runs to the exit door,” he says. “If you can hide in the stairwell while they’re running, you can go and pick up all the phones and watches and come out holding them.”

We’ll round off by returning to the AFR where the unthinkable is now happening:

…The Reserve Bank estimates that a 10 per cent increase in net housing wealth raises the level of consumption by around 0.75 per cent in the short run, and by 1.5 per cent in the longer run. But behavioural economics suggests that we feel losses twice as much as gains – does that mean the negative wealth effect is more powerful than the reverse? It seems reasonable to assume so.

Findings published by the National Bureau of Economic Research, which included the post-GFC experience for US households, suggests that negative equity reduces household mobility by around 30 per cent, although there appears to be some debate around those conclusions. Workers and families unwilling to crystallise losses are less willing to move to find better jobs, reducing the dynamism of the Australian economy.

There is also evidence that the GFC has soured younger Americans on home ownership. Owning your own home has long been the aspiration for most Australians. Yet younger Aussies are already leery of buying into unaffordable property markets, and further house price falls could lead to a further shift in attitude to homeownership among a whole new generation. The impacts could be profound: societally, politically, as well as economically.

Yes, they will. That’s the rub with a house price crash. It triggers household deleveraging across the board not just for the worst effected. This is called a balance sheet recession, experienced by many other countries before us, via Wikipaedia:

A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving by paying down debt rather than spending or investing, causing economic growth to slow or decline. The term is attributed to economist Richard Koo and is related to the debt deflation concept described by economist Irving Fisher. Recent examples include Japan’s recession that began in 1990 and the U.S. recession of 2007-2009.

A balance sheet recession is a particular type of recession driven by the high levels of private sector debt (i.e., the credit cycle) rather than fluctuations in the business cycle. It is characterized by a change in private sector behavior towards saving (i.e., paying down debt) rather than spending, which slows the economy through a reduction in consumption by households or investment by business. The term balance sheet derives from an accounting equation that holds that assets must always equal the sum of liabilities plus equity. If asset prices fall below the value of the debt incurred to purchase them, then the equity must be negative, meaning the consumer or business is insolvent. Until it regains solvency, the entity will focus on debt repayment. It has been argued that a balance sheet recession essentially is the same phenomenon that the German economist Wilhelm Röpke and Austrian School economists in the 1930s denoted as a secondary deflation.

High levels of indebtedness or the bursting of a real estate or financial asset price bubble can cause a balance sheet recession. This is when large numbers of consumers or corporations pay down debt (i.e., save) rather than spend or invest, which slows the economy. Economist Richard C. Koo wrote in 2009 that under ideal conditions, a country’s economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero. When imbalances develop across these sectors, recession can develop within the country or create pressure for recession in another country. Policy responses are often designed to drive the economy back towards this ideal state of balance.

Rather than savings by households being invested by businesses, as is the case under typical economic conditions, the savings remains in the banking system and will not be invested by businesses regardless of interest rate. A large private sector financial surplus (savings greater than investment), a proverbial “hole” in the economy, can develop.

Paul Krugman wrote in July 2014: “The logic of a balance sheet recession is straightforward. Imagine that for whatever reason people have grown careless about both borrowing and lending, so that many families and/or firms have taken on high levels of debt. And suppose that at some point people more or less suddenly realize that these high debt levels are risky. At that point debtors will face strong pressures from their creditors to “deleverage,” slashing their spending in an effort to pay down debt. But when many people slash spending at the same time, the result will be a depressed economy. This can turn into a self-reinforcing spiral, as falling incomes make debt seem even less supportable, leading to deeper cuts; but in any case, the overhang of debt can keep the economy depressed for a long time.”

There you have it. That’s why MB has been campaigning for the RBA to look forwards instead of backwards; to not double its mistake of growing the debt bubble by refusing to ease its deflation. It confronts a new kind of recession that it apparently does not yet understand, probably because to do so requires taking responsibility for causing it.

The pressure is now mounting to extreme. Even Treasurer Josh Frydenberg piled in on Sunday in a clear volte farce:

Treasurer Josh Frydenberg has raised fears the property downturn in Sydney and Melbourne could flow into the broader economy, hitting small businesses that have taken out loans on the value of their family home.

The comments, in an interview with The Sunday Age and Sun-Herald in Canberra, a fortnight out from his first budget mark a shift from the top levels of the Morrison government which has prided itself on using a “scalpel” to treat over-heating housing markets but now faces price falls largely beyond its control.

“Now the issue is different,” said Mr Frydenberg. “People are concerned about the impact of lower prices on the future of the real economy and particularly that spill-over into household consumption and into the ability of small business to grow and expand and invest.”

The odds of an RBA explicit easing bias in April and rate cut in May are shortening fast.

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