What happens to Australian property prices during 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!
As COVID-19 spreads across the world and drags the global economy down the talk of recession is getting more urgent than ever. And for a country as property-obsessed as Australia it's natural to wonder how a recession will hit our property markets.
We can't fully predict the future, and some experts are now saying prices could fall in 2020 (you can read a good article on the chances of a decline here).
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 last 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."
And the result? Prices in the major property markets are moving upward once again.
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
What does it mean for you if we’re no longer in a recession?
The recession is apparently over – but what does this actually mean for your money, and what impact does it have on your savings, loans and investments?
Australian Property Half Time Report
Various data sources reveal just how resilient the Australian property market is.
RBA survey: Experts predict slow recovery for Melbourne property market
Melbourne homeowners may need to wait at least two years before the property market shows signs of growth according to Finder, Australia’s most visited comparison site.
What a recession means for the stock market
SPONSORED: Do stock markets always crash when there’s a recession?
What happens in a recession?
You've heard Australia is in a recession, but what does this actually mean for you and how could it affect your day-to-day finances?
Global currency, recession and Bitcoin, part 1: What, why and how?
How to make sense of Bitcoin next to the rise of a global digital currency to replace the US dollar.
How the oil price war will impact Australian stocks
Will the oil price war and coronavirus lead to another GFC?
Where should you buy property in 2020?
With property prices on the rise, real estate expert Conrad Panebianco takes us through some key locations to look at if you're planning to buy in 2020.
Australian economy, housing market and recession forecast for 2020
What's in store for 2020? Housing boom or recession? Finder's panel of economic experts weighs in.
Predicting Australian property trends in 2020
Property predictions are a mug's game. Nevertheless, here are six of them.
Home Loan OffersImportant Information*
Ask an Expert