Plunging house prices will torch Aussie household wealth

The surge in Australian house prices over the pandemic increased the value of Australia’s stock to around $10 trillion, pushing total housing assets to an all-time high 6.6 times household income – up from 5.1 times income immediately before the pandemic:

Australian housing values to income

The pandemic surge in house prices drove up wealth.

According to CoreLogic, this boom in values drove housing’s share of household wealth to an equal high 58%, up from around 52% in early 2019:

Housing share of wealth

Betting it on the house.

Australian house values are obviously now falling following the commencement of the Reserve Bank of Australia’s (RBA) interest rate tightening cycle in May. Values across the combined capital cities fell by 0.8% over the June quarter, driven by Sydney and Melbourne, whereas regional price growth slowed rapidly to 2.0%:

Capital city versus regional house price growth

Price growth slowing rapidly.

As the RBA continues to hike interest rates, falls will likely accelerate across Sydney and Melbourne as well as spread to the other capital city and regional markets. As explained today by Tim Lawless at CoreLogic:

“Considering inflation is likely to remain stubbornly high for some time, and interest rates are expected to rise substantially in response, it’s likely the rate of decline in housing values will continue to gather steam and become more widespread”…

“Australia’s housing market outlook is becoming increasingly skewed to the downside, with the trajectory of housing values heavily dependent on the path interest rates take”.

In its latest Financial Stability Review, the RBA estimated “that a 200-basis-point increase in interest rates from current levels would lower real housing prices by around 15 per cent over a two-year period”.

Thus, with economists tipping an official cash rate (OCR) of 2.5% by mid next year, and the futures market now tipping an OCR of 3.6%, Australian house prices are staring at hefty price falls of between 20% and 25%, according to the RBA’s modelling.

Falls of this magnitude would wipe trillions of dollars of housing wealth from Australians’ balance sheets.

Unconventional Economist
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Comments

  1. Falls of this magnitude would wipe trillions of dollars of housing wealth from Australians’ balance sheets.
    If it was never real to begin with?

  2. pfh007.comMEMBER

    Everyone loves a bonfire!

    Hopefully enough speculators are reading about the imminent torching of their hard earned “wealth” and rush to convert their wealth into cash all at the same time.

    Bang a gong please.

    • Hugh PavletichMEMBER

      The major question is … will they get out before they are wiped out ?

      Its a 6 lane highway in to a market … but a goat track on the way out. (quoting Kyle Bass).

      There is a world of difference between ‘wealth’ and ‘bubble wealth’ of course.

      It is well past time they learnt how to make real wealth.

      • pfh007.comMEMBER

        Hugh,

        I agree.

        If they were to attempt it there would be a rapid revision of those tedious pixie land “wealth” calculations.

        But few would be wiped out as long as they have jobs and make their repayments and having jobs is a function of economic activity which will go on if policy responds appropriately to a reduction in “wealth” effect consumption.

        • boomengineeringMEMBER

          Even if they did get out in time with a job, the wealth effect would be lost as inflation eats away at their cash hoard and other markets seem worse. Nowhere to hide.

          • pfh007.comMEMBER

            Don’t worry about inflation. We have an independent central bank who has one job. Smashing inflation and they will be fully supported by a government who will assist by smashing inflation expectations with loads of unemployment…..which they will import if required.

            This is far more likely than any serious attempt at reform.

            So getting out of the market was a good idea UNLESS inflation vanishes quickly and allows the bubble blowing model to resume.

      • wouldn’t it be funny (as in not) if you got out of the RE market just in time to see your “hard earned” used for some form of bail-in, or worse still to find out that the bank holding all of your lucre went belly up not long after you sold that investment property.
        I think this is a problem that’s front and center in the minds of Aussie “RE investors” when their asset prices are falling. And who could blame them, the whole game is rigged, they know it, you know it, I know it. When this dam breaks absolutely no one down stream has any hope of escaping unmarred. So where to position one’s self?
        Obviously the answer is up-stream but wtf does that mean for an economy that’s as narrowly focused as Australia. And what price premium will the owners of “up-stream” investments demand when the dam breaks?
        In a way I believe this is what we’re already seeing with the ever escalating price of energy, we tell ourselves that it’s temporary (all to do with supply disruptions in Russia/Ukraine) but maybe it’s not.

        • Goldstandard1MEMBER

          They should feel trapped because the wealth was never there in the first place. I’m long cash so not expecting bail in until my cash is tranferred into hard cash and better priced fire sale assets.

          • working class hamMEMBER

            My bank tried to restrict my withdrawal of a house deposit in cash during Covid, just before the first Qld border closure. We were worried about bail ins.
            Basically told me that they had to approve the reason before they would hand it over, then wanted to drip feed it 10k a week?
            If it really does go really south, a lot of banks aren’t going to want to give it back real quick.

  3. Will be interesting to see how Perth pans out. A house around the corner from me sold for $570,000 in 2013 and is on the market now in July 2022 for $575,000. Has also been on the rental market since 2018 for about $370 per week. Past ten years have seen little profit and even more likely losses in most of WA…

    • pfh007.comMEMBER

      Yes. People forget that Perth had a most miserable property get rich scheme for many years and yet continued to function without becoming a dystopian hellscape.

      • Yes but house prices and mortgages presumably much lower than east coast. Who wants to go into global recession and housing bubble bust with over 500k in debt, or over 800k as must have happened often in the recent blow up.

    • Diogenes the CynicMEMBER

      Last 10 years..Perth market had a peak in 2014 then fell about 20% to 2019 before rising again about 6-9 months before Covid hit in March 2020. It has risen strongly since but if are comparing back 10 years there is that trough in the middle of the period.

      • Bill, when you’re on a good thing, keep your mouth shut. Do you really want half a million easterners clagging up the joint and creating shortages of everything?

  4. Holiday In ScomodiaMEMBER

    ‘Wear your wellies Neil’…
    ‘Whys that?’
    ‘Cause you’ll be knee deep in plunge!’

  5. This is the most accurate headline by MB for a while. It’s not about mortgages (2.7T of 10T), it’s about the wealth effect driven by house valuations. This has driven consumption and when the economy is built on consumption, trashing peoples largest wealth generator will destroy their spending.

    Agree, it was not real to begin with and should never have got this stupid. If it keep rolling downwards, go long adult diapers.

    • Jumping jack flash

      Of those two numbers, 2.7T and 10T, only one is real. It happens to be the 2.7T. The 10T number is subjective and can vary up and down based on the prevailing conditions of the economy and the vapid urges of the people.

      But still, even though that number isn’t based on reality, the 10T number is very, very important because it is used to calculate the LVR. No other metric is used to gauge the viability of the 2.7T debt.

    • elasticMEMBER

      “The wealth effect” isn’t just people feeling wealthier and spending, it’s folks pulling equity out of their home to spend.
      Equity mate won’t be happening if there’s no equity or suddenly any equity is a whole lot more expensive to pull out

    • A 1/3 of people own outright, most would be old people. They aren’t out spending. 1/3 renting, they want house prices/ rent to fall. Now the other 1/3 is mortgage holders of which heaps would have bought 10/15/10 years ago, so even if prices went down by 1/2 they would still be in front. This is all rubbish to scare government into bailing out banks/mortgage holders instead of letting it fall like a free market is supposed to.

      • drsmithyMEMBER

        It shouldn’t be a free market. It should be a market that creates high quality low cost housing for as many people as possible.

      • Most of those renters are renting from a massive over geared property speculator who are punting on capital gains. The smart ones are exiting, most are not smart.

        • Arthur Schopenhauer

          Unsurprising. The number vacant houses in Kew, Ivanhoe and Eaglemont during Lockdown was about that. The uncharacteristic poorly kept garden gave them away.

          Where were the owners? Beach house, country house, or OS? They weren’t the sort of houses that get rented.

      • Goldstandard1MEMBER

        There is sooooo much more detail than you top line summarise. The complexity WITHIN even the group you think are sweet as a nut “the ones who bought 10 – 15 years” are just sitting there paying off their mortgage and have money on the sidelines. I am in this group and the severe majority leveraged INTO the last 3-6 years and are teetering without advertising it. Their business is leveraged against the house or they have 2-4 investment properties. You underestimate how much this toppling is going to affect the economy. Mental health issues are going through the roof and it get bad from here…..wait until consumers close their wallets and businesses busts go parabolic.

        • So you think we should keep going the way it has been? Constantly bailing it out as soon as it wobbles? When do YOU think is/was a good time for the piper to be paid and give the young a fighting chance of a decent life?

          • Goldstandard1MEMBER

            There is a lot in your question there:

            1. I think the piper should have been paid between 2006 and 2012. The bubble blew up to a ‘too big to fail’ level since then. THEN it had it’s covid over bubble blow.

            2. Now we are FORCED to take an economic catastrophe when it could have been managed better and we could have had dry powder. The RBA and all central banks should be thrown off bridges (like bankers were in the old days) for the contempt they showed keeping rates at emergency levels and condeming the masses to take on more debt than they could handle.

            3. My position on all this was to sell just before COVID (complete luck) to buy a bigger place for a young growing family but ended up renting when covid hit. So I have had great living arrangements and have dry powder, unlike the gov and RBA. I feel so sorry for ppl who were forced to buy because they felt they had to, and levered up to near max. The next 50 points tomorrow will have many ppl in dire straights because it won’t force sales just yet, but have you ever seen ppl enmass see house prices drop whilst they are being asked to pay more? It’s not pretty and has huge socital ramifications for spending, business, jobs and economy and ultimately-our false way of life (povo debt slaves driving Porches)……

          • Quantitative FleecingMEMBER

            @GoldStandard1

            “The next 50 points tomorrow will have many ppl in dire straights”

            Why? Because they won’t be able to install microwave ovens, refrigerators and colour tv’s? Or get their new custom kitchen deliveries?

            Oh, that ain’t workin’ that’s the way you do it
            Get your money for nothin’, get your chicks for free

    • In any case the wealth effect is BS. It’s just a fig leaf for ensuring bankers are making huge profits. If you want spending in the economy you could just pay people more.

  6. Jumping jack flash

    Paper wealth.

    The real problem we will have will be the demand destruction from the falling debt growth. Demand destruction will lead to destruction of jobs and wages, which will feed back into reducing debt capacity, combined with the reduction in debt capacity caused by simultaneously rising interest rates.

    It will be a three-pronged attack at the very foundations of the banks’ economy based pretty much solely on their debt – the New Economy, or, the Bankers’ Utopia.

    • Exactly as it’s supposed to happen, a good old fashioned clean out.
      A painful lesson in economic reality, that will serve a few generations well, and hopefully a return to well earned economic prosperity, not just relying on speculation.
      Who am I kidding………
      I doubt the govt has the stomach for it to happen fully, some hair brained ideas will be hatched the kick the can a little further
      Election cycles are what it’s about, and this mob will get only 1

  7. Putting a few of the themes above together maybe Bill has a point – move to or invest in Perth?
    You want limited/no debt, Perth property has done nothing for a decade, sitting in cash will mean you get smashed by inflation and/or get stung by bail in/bad bank. On top of this many folk on here are saying mining is the only thing that will thrive in the next decade = Perth booming.

      • boomengineeringMEMBER

        Busselton is a nice place and the dry climate much better than Syd, but I’m only 2 mins from surf and would have to drive to Yallingup there. That said am thinking of escaping to somewhere.

        • Boom,

          Not sure when you were last in Busselton, I’m thinking from what I’ve read here that would be quite some time ago. It is just like the southern or northern subs of Perth now. Move closer to Yallingup or wherever puts you close to the surf. Dunsborough is another place I think is overrated.

          • You are correct. Dunsborough is a sh!thole. That said, compared to most places East of the WA border, Dunsborough is still pretty awesome.
            Busselton on the other hand is truly an amazing place. Come visit and you wont want to leave.

      • Exactly. Nothing to prevent them backstopping 2.7T of existing debt at 2% or lower.

      • Inflation. Bet rba is already wishing it could pull tff ahead of time now. That’s all possible after the crash.
        Crash does mean prices coming down though. So someone has gotta take the pain first for the inflation to be able to kick in again. There’s no turning on the taps from these price levels.
        The price resets lower and then the system has enough slack to handle more inflation.

        • Bingo, inflation and the dollar fundamentally constrain the RBA’s ability to do another TFF.

    • MathiasMEMBER

      Australia sold its own people out. No amount of Authoritarianism is going to undo that one.

      Watch… as the Loyalty… jumps ship ;p

      We will get to see… who’s really Loyal to Australia … and who isnt ;p

    • ErmingtonPlumbingMEMBER

      Its the way you always wink at us while sticking your tongue out,…its very unnerving.

    • “I dont know why people hate me so much. Im really quite nice when you get to know me ;p”

      lololol sure you are, Mathias. That’s what the feral cat says as you try to release it from a trap before it sinks its teeth into you!

  8. So what do you do? We bought on the way up on the central coast as Sydney was going nuts in 2021. By metrics we didn’t extend too far. 27% deposit. Debt to income 3.6 – but it’s still a lot of debt. Rationalizing we though it would be fine as if we both bought a 500k apartment the overall debt load would be the same. I didn’t think that the reserve banks promise of no interest rate hikes would last till 2024, but I didn’t anticipate significant increases this soon or a potential housing market correction/big crash (inevitably finally arriving) along with global recession.

    We’ve had a valuation done and can likely recover our capital if we move soon plus 10% – my worry is that that if we don’t do this we end up losing value on the house, with massive interest bills and then being unable to move away form the coast. The house here is great but I don’t want to be unable to move from here as it’s a long way from Sydney after taking years to save the deposit.

    I remember reading posts from people that sold up in the early covid downturn expecting a crash and how that backfired in the short term. Timing the market is always advised against but I really don’t want to have a lot of debt through what appears to be coming. What’s the rational thing to do – bears will have one opinion, boomer parents and in laws another. Where to go for advice? On top of that if there is a panic and another TFF then who knows what happens. Hard to make rational decisions in a completely irrational market.

    • My 2c (not advice). If you sell up where do you live? If this is a home, not an investment, and if you can afford the repayments why go through the hassle and cost of selling/moving? Just stay where you are and don’t look at daily values.
      Yes it may go down in value but no one perfectly times the market to buy at the bottom and sell at the top.
      I would also argue the coast is roughly correlated to Sydney. If worst comes to worst and your house drops in value then so does Sydney so you can still move in the future once you get the mortgage further under control.

      • Goldstandard1MEMBER

        With all due respect, this is such a black and white answer. MOST people who have bought in the last 10 years have maxed out and done so with the EXPECTATION of increased capital. When it has risen they have extracted that value and spent it. So when you say “it’s a home” it’s half right, it’s a home with the expectation of increased value and leveraged to the hilt. That is why people who aren’t being forced to sell (yet), are considering it because they are trying to cap losses/floor the gains.

        Narapoia451 comment is true and the challenge facing lots of ppl right now.

        • Thanks Gs1 appreciate the perspective. I appreciate many bought with the expectations of increased capital but I’m not really sure MOST people extracted that value and spent it. I could be wrong but feel there are many people who maxed themselves out because they had to in order to get a home and many of these still have a large mortgage but not sure MOST have spent any increase in value.
          Nara said he bought in 2021 – IMO the year or 2 or 3 after buying you are still sh*#ting bricks because it doesn’t feel like you’ll ever get ahead. If everyone sold in year 1 or 2 after buying they’ve incurred some pretty serious costs and will then go through the same anguish next time.
          I’m just cautious – I’ve been following this blog since the very early days and many on here have been saying “property is going to crash” and we need to be cautious. If you can manage your mortgage then I think given the costs involved and the risk property doesn’t crash need to be considered before any of us think we can time the market.
          Cheers

          • Hah you pretty much nailed it here: “the year or 2 or 3 after buying you are still sh*#ting bricks because it doesn’t feel like you’ll ever get ahead”

            I wouldn’t mind as much if it looked like the most likely outcome was even a plateau where prices stayed the same. It’s the rollover that has really got the brickwork in the undies.

      • It’s not so much the daily values, but doubling the repayments with our deposit eaten away by deflating prices means basically being forced to stay here till prices either recover or capital is built back slowly. But I’m confident that we won’t want to be here long enough for either if those to happen so will be trapped here or forced to take real losses to move. Etc.

        Thanks for your input though, it’s the timing the market that I’m worried about. I’m happy to rent for a bit closer to the city and see how things pan out, it really does seem like hard times are coming on a global scale

    • Not sure if this helps.
      Couple of places on Sunny coast 3 bedders , cos they are in 750k range now.

      New listings last mth increasing, compared to last 12 mths sales.
      Before REA took the monthly graphs off recently, my area showed started to roll over after 35% increase last 12 mths
      People seeing the roll over taking their last chance to get out, possibly with no plan, or moving away.
      Possibly know the sunny coast can get spanked in a decent recession
      Started seeing TV ads for high end, high rise apartments. Haven’t seen them for ages.

      Property supply – Kuluin
      Listed in the last month: 31 ; Sold in last 12 months: 88 ; Median days on market: 47 << 30% of last yrs supply in a month
      Property supply , my area
      Listed in the last month: 10 ;Sold in last 12 months: 37 ; Median days on market: 15 -<< 25% of last yrs supply in a month