What happens to Australian house prices in a recession?

Historic data and expert opinion suggests that in the event of a recession, Australian property prices might actually rise.

We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!

Whenever there is talk of a recession it's natural to worry about property prices. This is especially true a country as property-obsessed as Australia. But answering the question is more complicated than it seems. A lot of the time, economic downturn doesn't affect property prices. And when it does, the biggest driving factor is lending policy.

This article will explore some data on past periods of economic distress and analyse why property prices fell, or didn't fall. Because it's not a simple question of recession = prices fall.

Australia hasn't faced recession since the early 1990s, but when we look at prices during this time we see they actually rose in many places. And despite avoiding recession during the global financial crisis in 2008, Australian property prices briefly fell. And the last period of prices drops (2017-2019) occurred in times of relative economic growth.

Exploring these events can give us a clue about how property markets might behave if recession strikes again.

What happened to property prices in the 1990s recession?

Australia hasn't been in recession since the early 1990s, as governments on both sides of parliament are quick to boast about.

What happened to property during this recession? Well, according to the ABS, property prices actually rose in most parts of the country during the worst months of the recession.

The most notable exception was Melbourne, where property prices fell and didn't recover to 1989 levels until 1996.

Interest rates explain part of the recovery. At the beginning of 1990, the official Reserve Bank cash rate was a shockingly high 17.50%, but it fell steadily throughout the following years.

"Interest rates rose for a while at the beginning of the recession but quickly dropped again," explains property expert Michael Yardney. "At the same time our Big Four banks, which were up till then concentrating on commercial loans and business loans, moved into the home lending market as their traditional business lines dried up. This availability of easy credit kept our residential property markets alive."

Melbourne's misfortunes then are due to what Yardney calls "the excesses from the late 1980s leading up to the recession [causing] a significant property boom fuelled by investor speculation". This, combined with higher unemployment in Melbourne relative to the rest of Australia, led to years of stagnant prices.

The Melbourne experience is an important reminder that "the Australian property market" is in fact a series of smaller markets, each with their own strengths and vulnerabilities.

What happened to prices in 2008?

The global financial crisis provides another instructive lesson. Australia famously avoided recession after 2008, and yet the same data shows that property prices actually fell around this time (although they recovered as interest rates fell).

How do we account for rising prices during a recession and falling prices when there's no recession?

"The GFC caused our financial institutions to take a look at what their risk level was and to take a look at what credit was in Australia," says expert property adviser Christine Williams. "Pre-GFC banks were lending anywhere between 103 and 120% of the asset value. And credit was so free and so open. The GFC really just brought it back into line."

"And that was why property hit and we avoided the GFC. It was a credit squeeze."

Williams said these restrictions remain more or less in place today, further protecting the property market against strong price falls. Our financial institutions have, in effect, learned their lesson.

Interest rates and lending policy are the key

The lessons of history suggest that lending policy and interest rates really affect property prices. In other words, when it's easy for people to borrow money property prices tend to hold or grow.

The most recent period of property price declines during 2017-18 came at a time of low interest rates but much stricter lending policies.

Williams says that "Lenders became very strict and APRA came down with some very hard hitting policy changes" as a result of the Financial Services Royal Commission. "People just couldn't borrow the money because policies were so strict."

APRA has since loosened this lending policy and interest rates have fallen even lower with recent cuts to the official cash rate.

And the result? Prices in the major property markets are moving upward once again.

Insights in the Finder app

Want to give your savings a boost?

The Finder app hunts down personalised ways for you to save. You could save on your bills, mobile plan, credit card, insurance and more. Pop in your phone number below to get your download link.

More guides on Finder

Home Loan Offers

Important Information*

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Go to site