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RUBY:

From Schwartz Media, I’m Ruby Jones this is 7am.

For a long time in Australia, property prices have been going up. But now, not only are they falling, they’re falling at historic speed.

So is this moment just a blip on the road to even bigger highs… or is it something more?

Today, national correspondent for The Saturday Paper, Mike Seccombe, on what's driving the property market, and whether people locked out might ever be able to afford a home.

It’s Monday, October 31.

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RUBY:

Mike, right now the value of housing is dropping at the fastest rate that we've ever seen. So, tell me about what it is that we’re seeing right now?

MIKE:

Well, yes, and let's face it, real estate is everyone's favourite dinner party conversation, right? It seems, in Australia. Yeah, well, houses, house prices are at the moment going through their fastest downturn on record. If we look at the national data up to the end of September, we've seen housing values fall by 4.8 per cent nationally from their peak around the end of April— more than that in the big cities. In real terms, one estimate from Domain said the average house price in the capital cities were around $53,000 lower than they were back in March. So, that’s a big paper loss for most people who like to think about the value of their real estate.

But even after this decline, of course, there's concern that property in the major cities is still overvalued. The global investment bank, UBS, in a study of cities around the world described Sydney property, even after this decline, as highly overvalued. I guess the question is, is this decline now just a pretty minor retreat from historic highs and is the long term trend still up or could there be a bigger drop?

So, last week we got some insight from the RBA into what they think might happen. There was an RBA paper released under FOI that suggested a national drop could be as high as 20 per cent overall. This, I should add, was the calculation of one unnamed analyst. So, you know, possibly at the pessimistic end of the spectrum. Other experts I spoke to, and the weight of opinion at the RBA, it seems, suggests a national fall of around 11 per cent, low double digits, with bigger declines in the major cities.

But still, the trend overall at the moment is, I guess, good for people who are currently priced out of the market. 66 per cent of Australians, roughly two thirds of Australians, according to the census, own their own home—either outright or with a mortgage, but that's down a lot. 20 years ago it was over 70 per cent and the decline in homeownership has been much, much higher among younger people and people who don't earn as much money. For example, people 25–34, only 37 per cent of them currently own a home. 20 years ago, it was 52 per cent, so it's gone from, you know, over half to a bit over a third. So, it's a pretty sharp decline.

RUBY:

Absolutely, and this drop in housing values that we're seeing right now, it's coming in the context of a pretty dicey economic outlook globally and here in Australia. We know that inflation rates are on the rise and that's pushing up the prices of everyday goods for everyone. And the Reserve Bank is desperately trying to counter that, aren’t they?

MIKE:

Yes, they are and for the last six months the Reserve Bank has been quite rapidly jacking up interest rates.
The cash rate was increased by 0.25 per cent in May, during the election, and then by half a per cent, which is a pretty big jump by historical standards in Australia. By half a per cent each in June, July, August and September. Essentially, rates were going up faster than the banks could pass them on to mortgage holders.

This past month, the RBA reverted to increasing rates by just a quarter of a percent on a sort of “wait and see” basis to see what the effects were of those previous hikes.

RUBY:

Okay and so what is the effect of those previous hikes, Mike, are they working?

MIKE:

Well, real estate aside, not really. Last week's inflation data for the three months to September showed prices had gone up 1.8 per cent, which was the same as the previous quarter, despite the fact of all those interest rate rises and the annual rate was up to 7.3 per cent. So, this is not encouraging news.

Last week the government delivered a notably restrained budget and it did so anticipating the RBA would have to continue to lift rates from the current 2.6% to around 3.35 early next year to get inflation under control and get prices stabilised. Subsequent to that, release of the latest inflation figures. Numerous market analysts now predict the RBA will have to go considerably harder. And of course that's got other people worrying that such a sharp lift in rates could actually crash the economy.

RUBY:

Okay, so is the danger here, Mike, that if the Reserve Bank lifts rates too high too quickly, people won't be able to afford their mortgage repayments anymore. But if they don't go high enough, inflation will continue to rise and people won't be able to afford the cost of living anymore? So, it’s this kind of tightrope act here?

MIKE:

Exactly, it’s just like that. They're walking a very fine line. I spoke to Peter Tulip, who's currently the Chief Economist at the Centre for Independent Studies, and he was formerly with the research department at the RBA and before that he was with the Federal Reserve Board of Governors in the United States. As Peter Tulip says, Australia and the world has not had to deal with anything like the current economic scenario in at least a hundred years and possibly ever. This sort of set of circumstances where we're coming out of a pandemic, we've got a war going on, we've got an energy crisis, we've got a whole lot of different factors that are making the economic picture very complicated. The point, he says, is that in those circumstances, calibrating the amount that central banks, including the Reserve Bank of Australia, have to raise rates to slow the economy without actually going too far and tipping us into, you know, a recession, mass unemployment, business failures etc., is very difficult.

As he says, there's a big chance they'll do too little and there's a big chance they'll do too much.

As Mark Twain was famous for observing, history doesn't repeat itself but it often rhymes.

And if we look back to the last time inflation was running as hot as it is in Australia now, that was the June quarter of 1990. There are a few rhymes there, I've got to say.

RUBY:

We’ll be back in a moment.

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RUBY:

Mike, can you tell me more about what it is that we saw happen in Australia in 1990, which is the last time that inflation was running as high as it is now? So, what happened then and are we in danger of seeing a similar chain of events now?

MIKE:

Well, yes, the risk is there.

Keating and the Reserve Bank… they couldn't control inflation then.

Archival tape – Paul Keating:

“I guarantee you if you walk into any pet shop in Australia, the resident galah will be talking about microeconomic policy.”

MIKE:

It was running at an annualised rate of around 7.7 per cent in the June quarter that year. And at that time, inflation was a problem in many economies around the world, just like now.

In Australia it was fuelled by a big resources boom, just like now.

Property markets were overheated and overleveraged, just like now.

And we were in the midst of an energy crisis, arising from a war between two major oil producers, Iraq and Kuwait, at that stage.

RUBY:

Which is just like now, except it’s Russia and Ukraine.

MIKE:

Exactly, exactly. And back then the economy was growing strongly and so they took this incremental approach where they nudged interest rates up a little bit, and then a little bit more and then a little bit more. And then finally they got them up to 18 per cent and then: Whammo! Whammo! Everything collapsed.

In the following quarter, the economy shrank by 1.6 per cent and the country entered a deep recession.

The Treasurer of the time, Paul Keating, had up until that point been insisting that we would have a soft landing.

Archival tape – Paul Keating:

“It’ll be a soft landing because we’re seeing in last week’s figures that great switch in the economy.”

MIKE:

But of course we didn't and Keating finally had to admit that we were in for a bad recession.

Archival tape – Bob Hawke:

And the first thing to say is that the accounts do show that Australia was in a recession. The most important thing about that is, that this is a recession that Australia had to have.

MIKE:

Unemployment rose to 11 per cent in early 1991. Borrowers started defaulting on their loans, which caused banks to lose money and some financial institutions in Australia to go under, to collapse. Which of course took it from being simply a recession to being a financial crisis. And of course, this was a similar picture to the GFC. So, we can see that big property crashes can in fact go on to infect the financial system more generally and things can get very ugly quite quickly.

RUBY:

Okay, so it's clear there are parallels then between what happened in 1990 and the situation that we're finding ourselves in now. And we know that what happened in the 90s was those conditions led to a recession, but what is different about today? And does it give us a chance at avoiding that downward spiral?

MIKE:

You're right, a few things are very different this time. First of all, unemployment is at the lowest rate in 50 years which is quite different from 1990. In 1990, unemployment was quite high even before we entered recession. So, unemployment is at the lowest rate in 50 years, which means that our jobs look reasonably secure. The budget forecast is that they might rise a little bit, but, you know, still to what are, by historical standards, very low levels of four and a half per cent or thereabouts. And that's very crucial because as long as unemployment stays relatively low, then people will be able to afford to keep paying their mortgages, or the vast majority of people will—even if it does get considerably more painful for them to do so.

The other thing to consider here is that courtesy of the pandemic, when we couldn't spend a lot of money and when the government gave a lot of people a lot of money, the average mortgage mortgagee isn't likely to default any time soon because on average they're about two years ahead on their payments. So, in other words, you know, as interest rates came down, most people just kept paying their mortgage at the same rate, so they got well ahead. The other thing is, of course, because people couldn't spend money or couldn't spend a lot of money for the past few years, they've squirrelled away a lot of savings during the lockdown. So, that's both a good and a bad thing. It's a good thing because it means that we're not likely to see, you know, large scale defaults or anything. It's a bad thing because people have got lots of money that they can spend, which in turn can fuel inflation.

And finally, the other thing that is very different is that interest rates have been trending down for a very long time. Essentially, since the end of the early 90s recession. One economist I spoke to, Chris Richardson, reminded me that the Bank of England during the pandemic, went back through history and concluded that interest rates had not been as low as they were around the world for 5000 years. So, you know, take that assessment with a grain of salt, but the point is, interest rates, even though they are now rising very quickly, are rising from a historically low base. So, they're unlikely to hit anything like those highs, you know, that 18 per cent highs of the early 1990s. Mind you, because people have taken on greater debt while rates were low, even small rises will be sharply felt. But I guess the bottom line here is that things are not by any means dire yet.

RUBY:

And Mike, we started this conversation talking about house prices and how they're going down at the moment. And I have to ask for those who haven't been able to get into the market, who've been locked out for a long time now because prices have been going up for so long, could this actually be a good thing? You know growth in Australia's housing market has seemed unsustainable—you and I have spoken before about it being a bubble. So, could a slowdown or even a downturn be for the best?

MIKE:

Actually, you’re right, I think it could and so do a lot of economists I spoke to, assuming that is, that we don't go too far and we don't go into recession, we don't see lots of unemployment, we don't see business failures and a financial crisis etc., à la 1990. But the thing to remember here is that even if that worst forecast of that pessimist at the RBA came true and things fell 20 per cent, well that would only wipe out the gains of the past couple of years of the pandemic. That's how fast prices were rising. It was unsustainable, it was ridiculous, frankly. And economists have long argued that the money pouring into housing not only locks more and more people out of the market, which exacerbates inequality, it also stops money going into more productive endeavours.

That said, you have to wonder how long any downturn can continue, given that we have a shortage of housing already in the country, particularly rental accommodation. You know, the sad political reality is that people who own houses want the value of those houses to go up. People who don't own houses want them to go down. Well, there are more people who own houses than people who don't. You have to wonder just how sincere our political leaders are, and I might add, the bulk of the electorate, about doing the right thing for future generations here.

I'm hoping that now that the heat's come off the market, maybe there's some will to keep it suppressed. But history indicates there's not great cause for confidence there.

RUBY:

Well, Mike, thank you so much for your time.

MIKE:

Thank you.

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RUBY:

Also in the news today…

More than 140 people have been killed in a stampede during Halloween celebrations in Seoul, Korea.

The stampede happened after 100,000 people descended on the nightlife district of Itaewon for some of the first major events after the end of mandatory masking in the capital.

And 1.8 metric tons of liquid methamphetamine bound for Australia have been seized in Hong Kong.

Authorities in Hong Kong said it was the biggest meth bust in the territory’s history.

The liquid was concealed in bottles labelled as coconut water and the shipment had originated in Mexico, on its way to Australia via Hong Kong.

I’m Ruby Jones, this is 7am, see you tomorrow.

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