Can too much house price growth hurt the economy?

Can too much house price growth hurt the economy?
Jonathan ChancellorDecember 7, 2020

House price growth is typically regarded as a good thing. It creates a feel good wealth effect which triggers spending across the economy.

But the recent scenario from the Organisation for Economic Co-operation and Development casts that concept aside.

The Paris-based OECD said in its latest economic report that the single biggest threat to Australia is from rising house prices.

They suggested a recession was possible after a hard landing in the property market following our years of double-digit price gains.

Putting the risk of a recession at around one in five, the report said the residential market may not ease gently but develop into a "rout on prices and demand" especially given that households account for around half of Australia's total debt.

Their warning came a day after gross domestic product data showed the we'd avoided recession in 2016.

It also coincided with CoreLogic calculation that Sydney's price growth had firmed even further through February.

It now sits at an 18.4 percent annualised price growth with the house median a $895,000 and apartments at $685,000. 

The last time there was similiar growth in Sydney was in 2003 when prices jumped 17 per cent in 12 months to $454,000. Soon afterwards the Sydney market had crashed and then an extended price plateau set in.

Even further back was 1989 when Sydney prices jumped 24 percent in the wake of the 1987 stockmarket crash and bicentennial switch into property, that resulted in an horrific crash during our last recession. 

Normally house prices fall because of the impact of rising unemployment or rising interest rates. For the past few years there's been the looming spectre of fallout from an envisaged Chinese downturn, which hasn't eventuated.

But the OECD now suggests house prices could collapse because the ever increasing prices will trigger households into the realisation that they were carrying too much debt. Regulatory retraints will kick in too as a contributing factor.

It will create a downward spiral in economic activity that pushes up unemployment, accelerating mortgage defaults, and creating distressed bank balance sheets, turning what may have been an orderly "correction" in house prices into what the OECD warns could be a "rout".

The OECD did not nominate any timing on the tipping point.

And OECD has been at the misinformed bearish end of the forecasting spectrum for many years.

Despite the headlines that always come after their reports, the mum and dad home buyers and investors have stopped listening.

Driven instead by the fear of missing out or being on the sidelines given continuing price gains in Sydney.

The OECD's report does echo the Reserve Bank's recent unease over household indebtedness, which the new governor Philip Lowe considers could backfire into a spending slowdown.

But we aren't seeing any impact at Saturday property auctions. They've sat at 80 percent or higher for the past month.

This article was first published in the Daily Telegraph. 

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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