News - 3 Sep, 2019

Recession housing price discussion overlaps rate hold

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The word ‘recession’ often provokes a fearful reaction from anyone who hears it. So when economists start discussing whether the rebound in housing prices is going to be short-lived due to a looming recession, naturally the ears of homeowners prick-up.


While the word recession sounds formidable, the fact that housing prices are starting to recover from a slump and that the Reserve has once again left rates on hold are both favourable.

You might be wondering, why is this so?

Well, let’s take an in-depth look at what’s occurred recently and in the past, so we can put your mind at ease about the word recession and its impact on housing prices.

Recession housing price discussions

eChoice RBA Commentary for September 2019

The official cash rate sits at 1.00% as:

  • Inflation sits around 1.6%;
  • The Australian dollar fell to 0.67c US; and
  • Unemployment stays at 5.2%.

Economists are talking about a recession. For those of you who don’t know what a recession is, it is defined as two fiscal quarters (six consecutive months) where economic growth declines.

Looking at the global economy, economists have noticed that markers are pointing toward the U.S. entering into a recession. This outcome is linked to the trade wars occurring between China and the U.S. and also post-GFC growth waning.

The U.S. has been in recession previously in 2000 and 2008. Many economists will argue that in both cases, Australia managed to dodge any repercussions. Other economists highlight that Australia had more resilience back then. Our deficit wasn’t as high and our cash rate wasn’t as low – and this gave us more ‘wriggle room’ if the economy looked like it was taking a nosedive.

Other factors that economists remind us of is that we didn’t have such high household debt or non-existent wage growth as we do now.

But the stabilisation of the housing market in established and new dwellings is looking promising. According to Tim Reardon, the Housing Industry Association (HIA) chief economist, the stabilisation of housing prices will continue. This is provided that the credit squeeze subsides and the industry meets rather than exceeds demand.

Australia’s last recession and recession housing prices

The last time Australia experienced a recession was in the 1990s. At the same time, recession housing prices were flat and prices were dropping in some areas.

However, not all markets weakened during the 1900s recession. Melbourne recorded price drops of over 6%, but Queensland stayed steady. This is similar to what occurred in the latest housing market decline where Sydney and Melbourne’s prices plummeted and Tasmanian properties defied the downturn.

Therefore, the way that the housing market will respond to a recession will depend on the type of recession. For instance, if it is financial, then recession housing prices in Sydney and Melbourne are likely to be hit the hardest. However, if the recession is resource-related, then Western Australia is the most likely to suffer.

recession-housing-price-talk-overlaps-rate-hold

Historical housing price changes during economic downturn

Looking back at historical housing data from the 1990s recession and the 2008 Global Financial Crisis, it becomes apparent that while some housing markets became volatile, not all reacted the same way to the economic changes. Some markets showed little or no signs of change during an economic downturn due to the ability of their state, city or town economy to keep them buoyant.

But historical data also shows that all Australian states and territories have experienced recession multiple times since the mid-80s. For example, Sydney faced nine months of declining gross domestic product (GDP) during the 2012-13 financial year. This technically means the city was in a recession. Yet between 2013-2017, the same city realised a 70% increase in property prices.

During the 1990s recession, the national GDP dropped by 1.7%, and unemployment in Australia rose from 7.4% to 10.1%. In comparison, the Australian GDP rose by 2% and unemployment hovered around 5.2% during the first quarter of 2019. However many larger companies such as Big W are closing stores that are not performing and this could increase Australian unemployment levels.

With the 1990s recession came housing price declines in some capitals, while other capitals realised growth. Sydney and Melbourne’s home values declined by 7% and 2.3% respectively, whereas Brisbane property prices increased by 6.8% and Hobart dwelling values rose 4.3%.

If we compare the 2008 GFC, the 2014 Mining Downturn and the 2018 Credit Crunch, then the impact on different markets becomes more apparent.

The 2008 GFC differed to the 1990s recession. All capital city markets witnessed a drop in home values, though some of these drops were far less than others. The period of decline for Australia proved relatively short after the GFC and the market recovered quickly.

Whereas the mining downturn in 2014 only affected Perth and Darwin housing markets. Sydney, Melbourne, Hobart and Canberra markets prospered because they weren’t reliant on mining resources.

The recent Credit Crunch, where lending criteria tightened, was a different story. This change restricted investor lending nationwide and made it harder to borrow, so it affected a higher proportion of the market. As a result, most Australian markets declined in value.

All of these economic shocks highlight how different types of economic change impact the housing market. They also showcase how the housing market adapts to these changes and recovers. Therefore, it becomes apparent that no matter the financial ripple, the housing market is quick to rebound.

Words by Tricia Snell

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