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What Happened During Previous Property Market Downturns?

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Interest rates are rising rapidly, raising concerns about a sharp and sustained fall in home prices.

Some forecasters have warned that imminent revisions will cause real estate prices to fall 30% from their peak in March this year. A milder forecast is expected to be a 10-20% decrease.

However, it is important to put these declines in forecast prices into context.

House prices have risen tremendously over the last two years. This is a staggering 34% increase since the outbreak of the pandemic in February 2020.

So do you have to worry? If so, how are you worried?

So far this year Interest level The Reserve Bank of Australia has raised its cash rate three times since May, rising sharply from a record low of 0.1% to 1.35%.

It is likely to get higher at the same fast pace, RBA High inflation Do what you need to do to reduce inflationary pressures.

Australian house façade

History is not predictive of the future, but previous recessions may provide insight into what to expect.Photo: Getty


Interest rates rose 125 basis points Over the past three months, it is expected to increase by another 50 basis points in August.

Market prices currently mean a cash rate of close to 3.5% by December.

The impact of this rapid rise in interest rates is the slowdown and decline in real estate prices around Australia.

As interest rates rose, home price growth slowed nationwide, and prices began to fall sharply in some regions. The PropTrack Home Price Index It has shown a national decline of 0.55% since March.

Mortgage rates are rising and many are no longer able to borrow the same amount as this time last year. As prices continue to rise, borrowing capacity will be further limited.

This means that future buyers will not only face higher borrowing costs, but also greater uncertainty about future mortgage service costs than in the last two years.

This is reflected in the housing market. Demand for potential buyers is declining as self-confidence diminishes and fears of oversight subside. Auction volumes and clearance rates have fallen, and sales volumes have slowed from last year’s levels.

House prices may continue to fall from this year to next, and these trends are expected to continue.

These declines will accelerate in the coming months and may be more widespread.

So what was the recession in the past?

History is not predictive of the future, but looking at previous recessions can provide insight into what to expect.

Since 1990, there have been only five periods of negative growth in nominal home prices at the end of the year.

These recessions did not exceed 10% at the end of the year. And in all cases, the previous rise was greater than the subsequent fall.

Looking back on 1880, Inflation-adjusted, no 30% price drop has occurred..

The front of the house with a sign for sale

Rising real estate prices are chilling, especially in Sydney and Melbourne.Photo: Getty


That doesn’t mean that what we’re seeing now, the most aggressive tightening cycle in over 40 years with respect to the ratio of debt repayment costs to disposable income, doesn’t justify home price adjustments.

However, some predict that whether these reductions will be close to 30% is a completely different matter.

Interest rates have risen heavily, and domestic prices are currently expected to fall by 9% to 15% by the end of 2023, with significant declines in Sydney and Melbourne, and continued resilience in Adelaide, Perth and Brisbane. I have.

How long and steep was the recent recession?

According to PropTrack’s Home Price Index, in recent history, Australia’s overall downturn lasted an average of 9 to 10 months, with prices declining by an average of 2.8% from peak to trough.

Things are a little different in Sydney, where the recent recession lasted an average of nine months and prices fell 3.4%.

The biggest peak of the valley’s decline in recent years was 2018/19, when national home prices fell 5.5% in 13 months. Again, the drop was big in Sydney, with home prices falling 11.4% in 22 months.

Sydney’s housing market has a deeper valley when it comes to price declines.Photo: Getty


In 2018/19, interest rates did not rise, but wage growth was sluggish and the labor market was weak. It has decreased.

And what about the price going down further?

Some of the historic home price declines across the integrated capital are larger than recent revisions, but nonetheless have not seen a 30% decline. Prices fell by an average of 5.3%, with an average of six months of decline.

So what’s next?

Interest rates are currently rising rapidly, and mortgage rates are following suit, and as interest rates continue to rise, borrowing capacity will be further limited.

If the cash rate exceeds 2% and it is passed to the mortgage rate, the maximum borrowing capacity is limited by nearly 20%. Mortgage service costs will also increase significantly.

This affects potential borrowers and puts pressure on home prices.

The silver lining, which can offset this to some extent, is a tight labor market. We hope that the unemployment rate will be the lowest since August 1974 and that the result will be stronger wage growth. Overall, households also sit in a large buffer of savings and wealth that has accumulated since the outbreak of the pandemic.

Today, households are under pressure as living expenses rise with interest rates, putting real wage growth in a serious negative territory.

The big question is how household spending is against the backdrop of rising inflation, rising interest rates and falling house prices (the negative impact of wealth) compared to savings and asset buffers, and hopefully stronger wage growth. Is it maintained at?

How this develops is important in determining the loss of economic conditions, and as a result, how high and rapidly the cash rate rises.

This dynamics is also a major source of housing market uncertainty and the pace and depth of price declines.

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