Lowe explained that over the five years to 2017, Australian house prices rose almost 50 per cent. Since then, they’ve fallen 9 per cent, bringing them back to mid-2016 levels.
Lowe ran through some of the reasons for this.
The biggest part of the problem is supply; population growth took off in the early 2000s and it “took the better part of a decade for the rate of home building to respond”.
“It took time to plan, to obtain council approvals, to arrange finance and to build the news homes. Not surprisingly, house prices went up,” Lowe said, adding that eventually the supply came, and prices have again responded to supply.
Strong conditions for investors, both foreign and domestic, played a role too. Finance conditions have more recently become an issue, but Lowe also played this down
“Only 10 per cent of people borrow the maximum they are offered. Sensibly, most people borrow less than what they are offered, so the effect of this reduction in borrowing capacity has not been particularly large,” Lowe said.
Which brought Lowe to the one of the great economic debates of the housing sector: What wealth effect do rising and falling house prices have on the larger economy?
The RBA’s numbers suggest that for a 10 per cent increase in net housing wealth, the level of consumption rises by 0.75 per cent in the short term, and 1.5 per cent in the long term.
The biggest impact from increasing household wealth is on motor vehicles and household furnishings – people buying more cars and couches.
(Although the latter category isn’t clear-cut, either. Rising housing prices are also associated with times of higher housing turnover – buy a new house, and you’re likely to buy new furniture.)
But Lowe’s argument is that house prices are not as important for consumption as household income, the main source of which is human capital – that is, salaries.
“My conclusion here is that wealth effects are influencing consumption decisions, but they are working mainly through expectations of future growth income,” Lowe said.
“Swings in housing prices and turnover in the housing market are also having an effect, but they are not the main issue.”
Lowe’s argument was supported earlier in the day by Oxford Economics head of macro research, Gabriel Sterne, who addressed an exclusive breakfast at the Business Summit.
His research also suggests the housing wealth affect is limited, and he argued that falling housing prices shouldn’t threaten the broader economy.
“The banks are going to be OK, I don’t think the housing wealth effect is going to be very big, so you just need a live with lower house prices – which might not be a bad thing,” Sterne said.
Sterne also argued that the fact Australia is coming into its 28th year without a recession does not necessarily mean we are getting closer to the next one.
The data, he said, suggest that an economy is most vulnerable to a recession early in the cycle, with the safest point around the eight, ninth and 10th year of an expansion. That stability does not seem to diminish the longer the cycle runs.
Of course, that’s no reason for complacency. The fact that it is household income rather than housing wealth that drives consumption shouldn’t have heaving sighs of relief, given tepid wage growth.
The federal election might bring that other obsession – what we earn – back into sharper focus.