The Link Between Recessions & Property Markets
Earlier this year, for the first time in Australia since 2008, talk began of a looming recession as economists tried to predict the wider effects of COVID-19. The possibility of recession has many property owners around Australia concerned about the value of their home. But is that fear justified? And, does a recession automatically mean a crash in the housing market?
In short: Maybe, and no. While there’s an established relationship between a country’s GDP and the health of its housing market, there are other factors at play. As a result, it’s possible for GDP and house prices to fluctuate independent of one another. For example, when Australia’s stock market crashed in 1987 on what became known as Black Monday, the housing market continued to grow. Why? Chiefly because investors pivoted from equities to properties – the safer option. Just over two decades later in 2008, Australia survived the GFC without suffering a recession yet house prices still fell. The same underlying conditions that caused those disparities are also present in the current climate. And, they’ll play a critical role in determining what effect on our housing market COVID-19 will have.
Eliza Owen, Head of Australian Research at CoreLogic, says these factors include monetary policy, wages, employment, market interest, migration and consumer confidence. “If you look at some of the questions that underlie the consumer sentiment index, it’s about people’s understanding of their future financial position and their future income prospects. So in times of high job losses for example, that’s where we see a real drop off in consumer confidence,” explains Owen. “That’s reaffirmed by the fact we saw an increase in the unemployment rate during the GFC. At the moment, the ABS estimates that about 7.2% of paid employee jobs have been lost recently.”
This is where the delicate link between GDP and the property market exists. A shrinking national economy often results in a loss of employment and a stagnation in wages. When work is less secure and wages less dependable, it’s increasingly difficult to estimate one’s future financial position. This makes the purchasing of property a riskier move. So, consumer confidence plays a significant role in the property market. As a result, it makes more sense to look at the relationship between GDP and consumer confidence.
When the economy retracts, as it did earlier this year, consumer confidence tends to buckle as well. That said, there are safeguards in play. The Reserve Bank of Australia (RBA) swiftly and decisively cut the cash rate. This made it more cost-effective to borrow money for the sake of purchasing property. “The cash rate is one of the most important factors that influence movements in property prices,” says Owen. “During the GFC for example, there was more capacity to reduce interest rates. This may have cushioned conditions in the property market. Whereas now we don’t see as much scope for the cash rate to be further reduced.”
Indeed, during the GFC the cash rate was slashed from 7.25% in August 2008 to 3% by April 2009. However, upon entering the COVID-19 pandemic, the cash rate was already at the then-historic low of 0.75%, providing much less room for cuts. Even still, the rate was reduced to 0.25% by March 2020.
Despite those dramatic cash rate cuts in 2008, the housing market still took a dive. By June the national median house price had fallen by 1.4%, and by September it sank a further 2.1%. Without the space for such dramatic change in monetary policy, it seems likely that we’ll watch prices fall more significantly this year than they did in 2008. But as already highlighted, there are other factors to consider.
Firstly, Owen believes the housing market could be protected by the limited number of transactions currently taking place. Unlike shares, property is both an illiquid asset and a consumption good. This means not only are houses difficult to sell quickly, they’re also a necessity rather than strictly an investment. While shareholders rush to offload assets when a crash is forecast, homeowners are unlikely to do the same. “Because transaction activity has fallen so much, this might be something that’s protecting housing values,” Owen speculates. “We’re seeing very low levels of listings, buyers and sellers aren’t wanting to come to the market and that reduced level of stock is something that’s stopped housing values falling more dramatically.”
With restrictions easing and borders opening, it’s easy to be lulled into the idea that the worst has passed. And, perhaps that things can only improve from here. Unfortunately, the property market is slow to react, and Owen predicts we’re still months away from the theoretical low-point. “The outlook for the property market is that it’s going to lag behind the trough in economic conditions,” she says. “At the moment, the RBA is seeing GDP bottom out around September. So we could start to see that trough in the property market around Q4 or early 2021.”
What exactly that trough looks like remains hotly debated. With predictions between 10% and 30%, Owens believes it could’ve been worse if not for the introduction of stimulus. “Westpac were forecasting a peak unemployment rate of about 17% before the announcement of the JobKeeper package,” she explains. “Then, after the announcement they revised that to about 9%.” In more good news, Owens says the Australian market is in a position to recover – just not right away. “In the long term, we have to acknowledge there are some pretty strong demand fundamentals underlying the property market. So over the long term we expect to see continued growth in the housing market. I just don’t think it’s coming any time soon.”