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No amount of interest rate cuts could offset downside pressures that emerge as a result of a trade war-induced recession, according to REA Group’s chief economist.
Green shoots are beginning to emerge in the housing market, with growing signs of a recovery following a prolonged period of subdued activity, which saw national home values fall 8.3 per cent peak-to-trough and mortgage approvals fall by over 20 per cent in the year to May 2019.
The latest data from property research group CoreLogic revealed that national home values increased 0.8 per cent in August – the first monthly increase since the downturn commenced – while the latest Lending to Households and Businesses data from the Australian Bureau of Statistics revealed that the value of home loan approvals increased by 5.1 per cent (seasonally adjusted terms) in July – the largest monthly increase since March 2015.
The improvement has been attributed to a range of positive market developments over the past few months, which include public policy certainty off the back of the federal election, the Reserve Bank of Australia’s back-to-back reductions in June and July, as well as recent changes to mortgage lending guidance.
Market analysts, including REA Group’s chief economist, Nerida Conisbee, have said that such improvements mark the end of the housing market downturn.
“There definitely has been a shift,” Ms Conisbee told Mortgage Business. “What we can see from search activity is that there’s been a 25 per cent increase over the past 12 months.”
However, Ms Conisbee stated that global economic tensions could derail the recovery, making particular reference to the ongoing trade dispute between the United States and China.
The economist warned that Australian regulators would be somewhat powerless if downside risks associated with the trade tensions spillover into the domestic economy.
“The trade war is still ongoing; it is impacting China’s growth, [and] if it does continue and impacts our economy, there’s very little that monetary policy can do to really assist,” she said.
“We can keep cutting interest rates and that will help people borrow more, but if people start to lose their jobs, then that becomes extremely problematic for property.”
Ms Conisbee said that in a worst-case scenario, a trade war-induced recession could trigger property price falls that resemble those experienced during the recession of the early 1990s.
“If things do go pear-shaped, then it could be a drastically different market, and the impact will be dependent on what happens,” she said.
She continued: “If you look at the last recession, which was in the early ’90s, we saw Melbourne pricing drop by 50 per cent over a five-year time period. But at the same time, [prices] in the Gold Coast increased 20 per cent.
“[That’s] probably quite realistic for this time around, too. The worst case is you go into recession, some markets will be hit very badly, and others would be hit far less.”
However, the REA economist noted that if current trends continue, she expects an “orderly recovery” in the housing market, predicting price growth of 3-5 per cent over the next 12 months.
“[Realistically], the economy is still growing, we’ve still got low unemployment,” she said.
“We’ve got low inflation, but it’s not catastrophic, so at this stage, it looks like we’re heading into a recovery that will be fairly moderate.”
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