A looming fall in Australia’s average house prices is likely to weaken the share market, other investment returns, and superannuation balances, economists warn.

News Corp Australia recently analysed all the major property price downturns in Australia since the 1970s and found that most went hand-in-hand with lower share prices and savings account returns.

A future nosedive in property prices would spell bad news for investors. “If property prices come down people feel poorer and it affects consumer spending, the share market and the economy,” said Shane Oliver, chief economist at AMP Capital.

As was widely anticipated by many economists and other pundits, the Reserve Bank left the cash rate on hold at the record low setting of 1.5% this April. However, investors are still facing heftier mortgages after all the major banks and many of the smaller ones lifted their interest rates for investors in recent weeks.

The banks are expected to continue this trend after APRA imposed new limits on interest-only mortgage lending in an attempt to reduce risks in the Sydney and Melbourne property markets.

Signs the downturn is just around the corner

Rising interest rates have been responsible for several property and share market downturns in the past, according to Oliver.

“I think we are at or close to the top in terms of price growth at the moment,” he said. National residential property prices rose 7.7% last year, with double-digit growth in Sydney and Melbourne, according to the Australian Bureau of Statistics.

Meanwhile, the latest data from CoreLogic suggests the pace of growth has accelerated dramatically this year. Sydney dwelling prices surged 5% in the March quarter and are now 18.9% year-on-year. Melbourne’s year-on-year increase is an equally eye-popping 15.9%.

Rex Whitford, principal of Wealth for Life Financial Planning, questioned how long the property boom would last, especially since lacklustre wage growth means more and more people will soon struggle with rising rent rates. “I am very concerned about where we are heading,” he said. “Some people make self-deluding comments that the property market never goes down in value.”

Whitford said property downturns have historically led to share market falls, as it all “comes down to the liquid nature of the share market.”

Many Aussies’ super funds have at least 50% of their money in growth assets, such as property and shares, which is worrying because the negatives are clearly lining up for property, including rising interest rates and tougher regulations. According to Oliver, May’s budget measures and “horrible affordability” in Sydney and Melbourne are compounding the looming crisis.

He expects average property prices to drop nationally from next year, and the severity of the drop would determine how much pain would be felt elsewhere. “This time it’s complicated because the strength of the property market is in Sydney and Melbourne,” he said. Other cities have had negative or lacklustre growth.

Oliver said a 5%-10% fall might not damage other markets and investments too greatly; however, a 20% drop would mean “you wouldn’t get much protection in the share market”.



Related stories:

Mortgage Rates Need To Rise Nearly 6% Before House Prices Begin To Slide Nationwide

OECD: Rapid Rise In House Prices Could Be Precursor To Economic Downturn



