Yahoo Finance 15% drop: Will the Ukraine crisis crash our property market?
What's happening on the other side of the world is horrific, and the humanitarian and economic impact will be long lasting, but what will it mean for Australia’s economy and our local property markets?
Only yesterday, I was shocked to read the headline: “Property prices set to tumble 15% as Ukraine crisis bites”.
Also by Michael Yardney:
It seems like the media and many commentators are looking for an excuse, any excuse, to explain why our property markets are going to crash.
Remember a couple of years ago it was the fiscal cliff we were going to fall off? Then it was massive unemployment and, more recently, surging inflation and interest rates that would cause our property markets to implode.
And this is despite history showing us otherwise – that our housing markets are remarkably robust and resilient.
But now AMP has suggested the fallout from the Russian invasion of Ukraine could slow Australian residential property sales, increase inflationary pressure and cause a downturn in housing values of about 15 per cent.
And that's despite a long history of Australia's property markets generally performing well during major economic, military and terrorist crises.
It seems these forecasts don't take into consideration the strength of the Australian economy, the shortage of good housing in Australia - which will soon be challenged by a flood of incoming migrants - and the resilience of our housing markets and the Australian banking system.
So, will a war overseas see local house prices crash?
The simple answer is no, but I was surprised to read the following argument in a major weekend newspaper:
“Property prices in Sydney’s harbourside post codes plunged about 36 per cent when mini-submarines launched an attack in Sydney Harbour in 1942 at the height of World War II.”
History shows that major international crises tend to cause short-term falls of confidence, which promptly rebound once political tensions ease and economic growth resumes.
Of course, Russia is one of the largest natural-resource suppliers, exporting 10 per cent of global oil, 20 per cent of global gas and 20 per cent of global thermal coal.
Even though Russia and Australia have limited economic ties, the biggest local threat from the Ukrainian crisis is likely to be rising oil and energy prices, which could lead to inflationary pressures.
The impacts of rising oil prices aren’t just felt when you’re filling up your car but could push up the cost of a range of items, from corn flakes to caviar, as higher oil prices lead to a rise in the costs of manufacturing and transporting goods.
But that doesn’t necessarily mean a rise in Australian interest rates.
At least not yet – that won’t happen until we enjoy “real” wages growth. Currently, the growth in wages is not keeping up with inflation.
And while the Ukraine war may slow our economic growth a little due to the negative impact on confidence, it’s unlikely to drive Australia into a recession, locally.
So why should property values fall?
Buyer demand is still high at a time when there is a severe shortage of well-located properties available for both sale or lease, and our tight rental markets will feel extra pressure as close to 200,000 migrants arrive in Australia over the next year.
Australian housing market has never ‘crashed’
If house prices were to fall by the amounts predicted, it would make it the biggest housing downturn in modern history.
While we have seen various segments of the housing market suffer significant price falls, we haven't seen the overall Australian housing market crash like these economists are predicting.
Andrew Wilson, chief economist of My Housing Market, explains.
“The last time property took a downward turn was in 2018, when Australian house prices plunged by about 5 per cent overall,” Wilson said.
“Prices also fell 4.8 per cent in 2011 after a period of post-global-financial-crisis rate rises from the Reserve Bank.
“Those falls pale in comparison to what are now being predicted. They are quite remarkable forecasts.
“Historically we’ve only had three years of falling prices since 1987.”
Strongest lift in the economy since 1976
And these forecasts come at a time when the Australian economy (as measured by gross domestic product) grew by 3.4 per cent in the December quarter – the strongest gain since the March quarter of 1976.
This strong growth followed a 1.9 per cent contraction in the September quarter, reflecting lockdowns. The economy is up 4.2 per cent on the year.
Source: Commsec
The biggest contribution to the expansion of the economy was household spending (+3.2 percentage points), followed by inventories (+0.9pp).
The Bottom Line
Even though Russia’s invasion of Ukraine is half a world away, its financial effects will be felt in Australia. Higher fuel prices will feed into price increases in a range of goods and services.
While this is likely to increase inflation, and possibly higher mortgage interest rates down the track, there is no reason to think this will crash our property markets.
Of course, a crash could occur if:
Australia fell into recession – that’s not on the cards
Unemployment rose and people couldn’t pay their mortgages – again that looks unlikely in the near future
Households experience mortgage stress - In fact most Aussie households are well ahead on their mortgage payments, with the RBA indicating a third of mortgage holders are two years or more ahead in their payments. And of course, the banks have stress-tested new borrowers to ensure they can maintain the repayments if interest rates rise by 2-3 per cent
Multiple rapid-fire interest rate rises - again this is unlikely because the RBA doesn’t want our housing market to crash
So, don’t lose any sleep over the predictions that property values will drop 15 per cent because of the Russian-Ukrainian war.
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