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‘Deep trouble’: How the government is pummelling house prices

Stephen Koukoulas
·4-min read
(Source: Getty)
Policy makers, it's your move, writes independent economist Stephen Koukoulas. (Source: Getty)

It seems policy makers in Australia have given up looking for a quick rebound in the economy.

Given up containing unemployment.

Given up doing whatever it takes to offset the negative economic effects from the Covid-19 pandemic with widespread economic stimulus measures.

The Reserve Bank of Australia Governor Philip Lowe has signalled in no uncertain terms that it has done about all it can to support the economy. Dr Lowe has ruled out further interest rate cuts, intervention in the foreign exchange market and additional quantitative easing with a ramping up in its bond buying program.

Last week, we saw the extraordinary situation of the Treasurer, Josh Frydenberg, announcing the fiscal policy would be tightened not loosened with the scaling back of JobKeeper and JobSeeker payments in what is rapidly turning out to be the 2020 Covid depression.

Cutting such payments with around 20 per cent of the labour force currently unemployed, underemployed or having dropped out of looking for work with few hard signs of a meaningful economic pick-up need stimulus, not penny pinching.

Housing is a huge pending problem

So far in the 2020 Covid Depression, house prices have only edged lower.

Nation-wide prices are down a bit over 2 per cent over the past three months, led by Melbourne which is down around 3.6 per cent and Sydney, down about 2.2 per cent. This is not all that worrying, for now, given prices were rising very strongly through to the early months of 2020.

But risks on house prices and therefore the economy are rapidly building.

The mortgage holiday offered to borrowers by the banks means there has been little in the way of forced selling, which is the rapid disposal of an asset because repayments cannot be made.

The banks are clearly so worried about the growing risks of a serious house price crash once this period of grace ends, most have extended the time which owner-occupier and investor mortgages can defer their repayments.

With the labour market all but certainty remain weak well into 2021, with immigration inflows down to near zero which erodes demand for housing, when the mortgage holidays do end, the risk of widespread forced selling is very real.

Such circumstances, which Australia has never experienced in a widespread way, would spell deep trouble.

Shrewd sellers may try to get in early, before the rush to sell in 2021. It will be important to monitor the number of properties listed for sale with any sharp rise likely to be a precursor for price falls.

If forced selling does emerge, these price falls could be sharp.

Some simple modelling that incorporates underlying demand and supply for dwellings, unemployment and interest rates points to potential price falls of 15 per cent by the second half of 2021. And note here the current record low interest rates are cushioning this downturn.

House price falls around that order of magnitude will smash household wealth, two-thirds of which is tied up in home ownership. With growth in household consumption spending driven in part by changes in household wealth, this risks knee-capping the economy next year.

It would also spell trouble for the banks who would be dogged by a surge in bad debts and loan arrears.

The natural reaction of the banks will be to tighten credit, which is prudent corporate behaviour, but would be a hammer blow to the growth prospects of the economy.

Which comes back to policy makers.

There is no doubt they are getting this sort of advice and risk assessment from their research teams.

The failure to ramp up stimulus right now rather than to stall or even withdraw it is starting to replicate some of the policy errors that made the 1930s Great Depression so severe.

More can be done. More stimulus is needed.

There is no doubt pro-growth policies from the government will help. The case is clear which means the long, long wait till the Budget on 6 October is hazardous.

Pump priming is needed now to lift the performance of the economy and help jobs right now, but should spill over well into 2021 when the house prices risks are most acute.

The flood of risks on the economy broadly and housing in particular are overwhelmingly to the downside.

Policy makers – do something now.

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