Will falling house prices trigger the next Aussie recession?

House prices are falling, auction clearance rates continue to drop and there is a such sharp lift in the number of properties for sale that, for the moment, no one is willing to buy at the given asking price.

Potential house buyers who have held off taking the plunge in the hope of falling prices seem to be staying away, perhaps hoping for further price falls. But also influential factors forcing buyers away is the extra difficulty getting loans approved as banks tighten credit standards, then there are concerns about job security and associated awareness of probable cash flow difficulties given the weakness in wages growth.

It is remarkably obvious that house prices will continue to fall and this poses a range of risks to the economy.

Research from a range of analysts, including at the Reserve Bank of Australia, show a direct link between changes in housing wealth and consumer spending.

This means that when wealth is increasing on the back of rising house prices, consumer spending is stronger.

This was evident in Sydney and Melbourne, in particular, when house prices in those two cities were booming in the two or three years up to the middle to latter part of 2017. Retail spending was also strong.

Looking at the downside, in Perth where house prices have fallen by more than 10 per cent since early 2015, consumer spending has been particularly weak.

Given that consumer sending makes up over 50 per cent of the economy, a marked pull-back in spending growth as the falls in house prices undermine wealth, raise the risk of significant weakness in the overall economy later this year and into 2019.

As seen with the data on building approvals, a house price slump will also see new construction levels fall, which will further undermine bottom line GDP growth.

It was been almost 27 years since the last recession in Australia. For now, a recession in the near term remains unlikely despite these negative influences which are only just starting to play out in the broader economy.

For the moment, the economy is being supported by solid levels of public sector infrastructure spending and non-mining business investment. Export volumes are also respectable, all of which will add to the economy and make a recession unlikely.

But with the global economy clearly taking a step lower since the start of 2018, some of the positive influence on Australia from global markets could start to fade.

Domestic policy uncertainty as the Federal election campaign hots up could also be a negative for private sector spending and the economy. The major parties will be arguing over tax policy, inequality, health and education, as well as who is best at managing the economy.

It is possible that an ugly election campaign will erode confidence, and with it spending into an already fragile economic environment.

As a result of all of these hard facts and risks, economic policy should be eased. This is not, as some have claimed, aimed at reflating house prices and wealth, but because the forces at work in housing suggest broader price weakness, regardless of the level of interest rates.

Indeed, a case can be made for maintain a prudent approach to house lending to work against such a price rebound.

Rather, policy has to be eased to ensure private sector business investment picks up more momentum, to help deliver a lower level for the Australian dollar which will boost exports and to enhance the cash flow of those with a mortgage but with no seriously vulnerability to the weakness in house prices.

If policy is not eased, the risk of a recession will build as house prices keep falling.