Three reasons this house price ‘collapse’ may last

So we are in the early stages of this house price plunge. The steady flow of bad news out of the housing market hasn’t fed into consumer spending yet, but it will.

The glass-half-full view of a 15 percent fall in national house prices is that it simply takes the market back to levels seen in 2020, before the market was gripped by a stunning pandemic price boom.

But even if price falls are contained to 15 percent over the coming months, this is still bigger than most households have experienced.

“Residential property price downturns in the last 25 years have mostly been mild, with prices falling less than 10 percent, and brief, with prices quickly rebounding to new record highs as rates fell to new lows,” Oliver says.

This time – and yes, we shudder to say it – might be different.

Based on market predictions, price falls already look like they will be faster and deeper than we’ve seen in the last quarter of a century. But it’s worth noting Aird and Oliver predicate their views on the RBA lifting interest rates to a peak of 2.6 per cent, where futures markets are pricing the RBA’s terminal rate will be closer to 3.9 per cent. At that level, Oliver sees falls of 30 percent as possible.

While Lowe might be relieved to see lower house prices and some heat coming out of the economy, he’d be very much alive to the pain that a 30 percent fall in house prices would cause across the economy. There’s a fine balance to be struck here.

Oliver makes two other good points about the potential differences between this house cycle and previous ones.

The first is that household debt levels have continued to push higher over the past decade, and in a rising rate environment have less scope to increase further; this will weigh on a recovery in prices.

Second, the arrival of what Oliver describes as a “more inflation prone world (with globalization reversing, increased defense spending, decarbonisation and bigger government)” means a return to the ultra-low rates that pushed prices sky high is likely over.

A deeper fall in prices could be followed by a slower recovery.

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