The Australian housing market continues to be a point of contention as pundits wonder how the softening housing market will hold up should a major economic correction occur. Recent insights from economists and researchers highlight factors that influence the stability of property prices, including homeowner equity, unemployment rates, and government initiatives to boost housing supply.
Ben Phillips, an associate professor at the Australian National University’s Centre for Social Policy Research, points to one encouraging trend. Over the past decade, millions of homeowners have built significant equity by paying down their mortgages. This relatively solid financial condition implies that a broad property market crash could be less inevitable than widely feared.
Independent economist Saul Eslake argues that this requires a very large demand shock together with a similarly large increase in unemployment. Only then might we witness a hard landing in the Australian property bubble. He warns that sudden economic shocks from outside forces might instigate such a scenario.
Unemployment as a Key Factor
Eliza Owen, head of research at CoreLogic, agrees that the unemployment rate is a critical element keeping the property market stable. She claims that the unprecedented unemployment-low levels we see now are necessary to begin preserving home values.
“So the unemployment rate is probably the thing that’s holding [the property market] together,” – Eliza Owen
As Owen goes on to clarify, if unemployment were to suddenly spike, the end result would be a significant drop in mortgage serviceability. Economic disaster is the breeding ground for increased forced sales. This massive addition of homes will increase supply and consequently put downward pressure on property values.
“If we saw a big blowout in the unemployment rate, that’s when mortgage serviceability becomes less stable, less certain,” – Eliza Owen
The prospect of a sudden jump in unemployment is not unrealistic. Unfortunately, historical precedents show that recessions can bring high levels of job loss quickly. For example, in the 2008 global financial crisis, Australia’s unemployment rate rose only up to 7.4 percent in July 2020.
Historical Context of Property Price Fluctuations
Australia’s property market has experienced three major corrections over the past 40 years. In each instance, residential real estate suffered a significant blow once the economy imploded. As CoreLogic’s chief economist noted, median property prices dropped around 8.5 percent across 11 months during the 2008 crisis.
From 1989 – 1991, Australia’s two largest cities experienced some of the largest drops in home values in history. That was even before house prices fell by 10 percent in Melbourne and about 9 percent in Sydney. Each one of these historical periods serves as an example of what can happen to property values during a major economic downturn.
Chronic land use malinvestment and the absolute scourge of our current housing market—its chronic shortage—has helped make it resilient. He argues that most owners now have amassed substantial equity and wealth. This makes them better poised to weather fiscal storms even better than they were during previous downturns.
“Most people in Australia are pretty wealthy and if you’re a homeowner… they have large amounts of equity, they’ve got large redraw facilities to survive during any sort of challenging financial times,” – Ben Phillips
Government Initiatives and Future Outlook
In recognition of continued, worsening housing affordability issues, the new Albanese government has taken steps to boost housing supply. These initiatives help provide shared equity schemes specifically tailored to first-time buyers in order to make homeownership less out of reach.
Phillips cautions that large-scale policies can be politically challenging to introduce. Homeowners who would lose value would predictably be very much against any change that has large negative effects on home values.
“That’s part of the issue is politically it is very difficult to introduce [new] big bang policies that may actually have some sort of impact on house prices because a lot of people are going to lose out,” – Ben Phillips
Political hurdles notwithstanding, the experts we spoke with were still apprehensive about the outlook for the housing market. Eslake suggests that in the event of an economic crisis leading to increased unemployment, the Reserve Bank would likely take measures to mitigate these effects by cutting interest rates significantly.
“I think the Reserve Bank would cut interest rates significantly,” – Saul Eslake
