Median home prices have now fallen for 12 consecutive months.
Houses in Melbourne and Sydney in particular have borne the brunt of the pain.
It’s actually about supply as well.
In this case it is the supply of 229,000 dwellings that are currently under construction.
Of these, 156,000 are private dwellings that aren’t houses — these would be high-rise apartments and units.
A big part of this was a surge in Chinese investment in 2015 — and the pipeline is massive.
Many of these apartments are sold off the plan, leading to a potential feedback loop based on negative equity.
Property market could see negative equity scenario
This is how the scenario plays out.
Negative equity occurs when small deposits, frequently less than 10%, are paid to secure the apartment before construction starts.
Credit tightens, and the prospective apartment buyers aren’t able to come up with the amount necessary to purchase the property.
Without a buyer, the developer is then forced to lower the price of the apartment after the settlement fails.
A glut of new apartments come on the market at prices significantly lower than expected.
Suddenly supply goes up as demand falls.
Repercussions could impact rest of economy
The repercussions could be huge for the property market.
As the UBS Australian economics team is quoted as saying in Business Insider:
‘The RBA are unlikely to cut the cash rate, and APRA are unlikely to reverse macroprudential tightening, meaning price falls could end up even worse, particularly in Sydney and Melbourne.’
As a result:
‘The risk is rising, not falling, of a negative wealth effect potentially leading to a credit crunch scenario.’
This is not just gloom and doom mongering — it’s a reality that has been years in the making.
The genuine fear now, is that falling home prices could drag the rest of the economy down with it.
For Markets & Money