House prices are falling... Be careful what you wish for, RBA

Stephen Koukoulas

Market Economics Pty Ltd

The recent house price data from Corelogic are showing further falls in house prices. The falls are, disconcertingly, most evident in Sydney where prices have dropped 0.5 per cent so far in January, which brings the aggregate fall since the September 2017 peak to a chunky 2.9 per cent. This means that for a $1 million property in September, the value has fallen $29,000 in just 4 months.

The house price weakness is not confined to Sydney.

In Melbourne, the Corelogic data shows house prices topping-out. Prices are down 0.3 per cent from the December 2017 peak which, to be sure, is not a large decline after the stunning increases of previous years, but a fall it is.

Brisbane prices are basically flat with no change over the past 3 months and no hint of a pick up in the early part of 2018.

Prices in Perth continue to trend lower, with a 0.3 per cent drop over the past 3 months bringing the cumulative decline since the late 2014/early 2015 peak to around 11 per cent. Ouch!

Of the five cities that Corelogic covers on a daily basis, Adelaide appears to have some modest momentum. But that said, prices in Adelaide are up just 0.3 per cent over the past 3 months and are up just 2.7 per cent over the past year.

The so-called 5 capital city aggregate index has fallen 2.8 per cent from the October 2017 peak.

This is big news. At one level, the fall is welcome and something the RBA and regulators were hoping to see as it wanted to take the heat out of what was an unsustainable book in house prices. The tightening in lending for investors and clamp-down on interest only loans are clearly biting. At another level, falling house prices are scary. A slump in house prices intensified the recessions in many countries during the recent financial crisis. Look at the economic horror in the US, UK, Spain, Ireland, to name a few.

It is safe to say that if prices in Sydney and / or Melbourne were to fall 10 per cent, there would be financial pain and hardship which would permeate through to the broader economy.

While some softening in the housing market is welcome, beware!

Oh, and by the way, it makes a mockery of those looking for interest rate hikes from the RBA. (I note the futures market has 50bps of hikes priced in by June 2019!) Nothing would be more reckless and irresponsible for the central bank to hike official interest rates when the housing market is under so much pressure.

Stephen Koukoulas
Chief Economist
Market Economics Pty Ltd

Stephen Koukoulas has a rare and specialised professional experience over more than 25 years as an economist in government, as Global Head of economic and market research, a Chief Economist for two major banks and as economic advisor to the Prime...


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