Depending on which news bulletin you're reading or which economist is giving their forecasts, the United States - and possibly the rest of the world including Australia - is on the brink of recession.
Given the ongoing US-China trade war this is a risk more serious recently and could have economic ramifications in many parts of the world.
Of course, this is what the doomsayers have been predicting for years yet despite all the economic turmoil around the world Australia’s economy has steadily grown for over two decades.
Obviously our economy is cyclical and it’s not growing as fast as the RBA would like. And yes Australia will probably have a recession again – but not any time soon.
So to help you understand what a recession is, what’s likely to be ahead for our economy and what a recession could mean for our property markets I had a chat with Australia’s leading housing economist - Dr. Andrew Wilson, chief economist for MyHousingMarket.com.au
During the Global Financial Crisis Australia avoided falling into recession, but some people have lingering memories of the problems that a recession brought overseas – people losing their homes, long unemployment queues businesses going broke.
And now with concerns about an international trade war, the Chinese economy slipping, predictions of America falling into recession, stock markets around the world losing billions of dollars in value in one day and Australia’s economy languishing, some in the media are speculating that Australia could slip into recession.
So let’s start with the obvious question…
What is a recession?
A recession is when there are 2 consecutive quarters of negative economic growth (falling GDP.)
What are the economic headwinds the Australian economy is facing?
• While the fundamentals are still strong locally, overseas issue including the U.S.-China trade war could tip the USA and possibly other economies into recession
• Locally low employment growth, particularly with the slowing in the construction industry and slow retail sales are an issue
Let’s not forget all the good news happening around Australia.
A recession is not inevitable – our feeling is that we’re probably not going to have a recession.
Here’s some of the good news that occurred in the last few weeks that you might have missed:
• Employment rose for the 33rd out of 34 months in July.
• Jobs increased by 44,000 but economists expected 14,000.
• Full-time jobs rose by 34,500.
• The participation rate rose to a record high of 66.1 (this is one of the factors keeping the unemployment rate high.)
• Consumer confidence is near its long-term average suggesting the optimists equal the pessimists.
• The NAB business confidence index rose from +2.3 points in June to +3.9 points in July.
And looking at the big picture:
• We don’t have the typical precursors to a recession:
o We haven’t had the excessive optimism and the boom you normally see prior to recessions
o Globally inflation is very low inflation and central banks haven’t had to raise interest rates to slow down their economies
o We haven’t had a huge surge in debt around the world or high levels of cyclical spending on things like housing, investment or consumer durables that normally precedes recessions
• Many parts of the Australian economy are chugging along nicely with strong infrastructure spending and solid demand for our exports, especially mining.
Let’s look at some history…
During the Global Financial Crisis of 2007 -9 many countries’ economies fell into recession.
All this began in 2007 with the subprime mortgage market in the United States, which developed into a full-blown international banking crisis and was eventually followed by a global economic downturn.
During that time house prices in many parts of the USA dropped up to 30%
Leading up to the last Australian recession in the early 1990’s high interest rates were employed to slow the asset price boom of the late 1980s.
These high rates put stress on businesses causing many to go under, unemployment rose to a high of 10.8% nationally (from 7.4%) but was much higher in Victoria which bore the brunt of the recession and many Australians had difficulty keeping up their mortgage payments.
However, if Australia slips into recession this time things will be very different to those days.
While we may have a “technical recession” – a period of temporary economic decline with a fall in GDP in two successive quarters, it unlikely to lead to significant falls in our property markets.
The prevailing circumstances are very different.
The concern for our property markets would be if people lost their jobs and couldn’t repay their mortgages, but this is unlikely to be an issue as :
1. Mortgage arears are low
a. Interest rates are at a record low
b. The banks have practiced responsible lending
c. Mortgage arrears are low and have declined again last month
2. Employment growth is strong,
a. Employment rose for the 33rd out of 34 months in July.
b. Jobs increased by 41,000 in July 2019.
c. There was a massive leap of 34,500 extra full-time jobs
d. The participation rate rose to a record high of 66.1% - in other words more people are entering the workforce than ever taking total Aussie employment to beyond 12.9 million for the first time.
e. the economy has added a thunderous +910,000 jobs over the past three years alone.
What will happen to property values if Australia does fall into recession?
While the health our property markets are driven by fundamentals, which are in general looking good, the unknown factor will be consumer sentiment, and there is no doubt that if Australia’s economy slips into recession there will be a lot of media coverage that is likely to cause consumers to stop spending until the future looks clearer.
If you think about it, people don’t feel comfortable making big spending decisions like buying a new home or upgrading their homes when their economic future is uncertainty.
In fact this is one way that recessions feed on themselves - when the media tells them we’re in recession we tend to stop spending in general and this just perpetuates the poor economic situation.
That’s why governments respond by lowering interest rates and giving spending incentives to keep the wheels of our economy going round. Things like first home owner grants or incentives for businesses to buy new equipment or employ more staff.
This means that if Australia does go into recession our property markets will falter, but they won’t crash like the more volatile stock markets are likely to.
And historical evidence supports this…
What can we learn from the last Australian recession?
The last Australian recession lasted 12 months – starting in the September quarter 1990 and ending in the September quarter of 1991.
During 1991 property values declines in Melbourne (0.5%), Perth (1.6%) while values grew in the other capital cities and many regional real estate markets.
In the subsequent years, while unemployment remained high and consumer confidence remained fragile as we worked our way through the aftereffects of “The Recession We Had To Have” (the words of the then treasurer Paul Keating) real estate values grew in all our capital cities and many regional locations.
The Melbourne property markets were hit the hardest, Sydney property also experienced tough times – but property values grew strongly in our other capital cities and all our capitals exhibited property price growth in the years following the recession.
There will be a flood of doom and gloom commentary
I know there is a group of people waiting in the wings for us to have a recession – wanting us to have a recession so they can say “I told you so!”
And of course the media will have a field day – lots of opportunities to create “click bate” headlines.
But just because we fall into what will technically be called a recession because our economy has 2 quarters of negative growth doesn’t mean our economy is in tatters. It’s actually in better shape than it has been for a long time and the envy of many other countries.
The bottom line
At some time in the future Australia’s record breaking run without a recession will come to an end.
While a recession in Australia will dampen overall property price growth, there are many factors that affect property values just as there are multiple property markets around Australia each at their own stage of their property cycle and each with their own unique mix of fundamentals including supply and demand, affordability, local economic and jobs and demographic characteristics.
While an international or an Australian recession is never a good thing – businesses will go broke, jobs will be shed, the stock market will fall and therefore the value of many investors superannuation will shrink – the effects on our property markets will vary dependent on local factors, but in general our markets are in good shape to withstand this shock.
Our housing markets are in the best position they have been in a long time to withstand an economic hit.
And homeowners have nothing to worry about as long as they can keep up their mortgage payments, even if home values experience a dip due to a slowing economy, because these slumps in property values are always temporary while the long term increase in property values is permanent