Australian real estate prices still rise during recession

Australian real estate prices still rise during recession
April 10, 2019 Simon Pressley

Australian real estate IS safe-as-houses! Even during significant economic shocks, historical evidence shows that property markets have proven to be resilient and that there are always markets where prices are going up.

Research conducted by Propertyology confirmed that the property markets of various locations in Australia produced growth as high as 20 per cent during our last national recession (1990-91) and during the Global Financial Crisis (2008-09).

For as far back as property data takes us, there’s never been a single year when property markets didn’t do well in many locations. Never!

While a national or international economic downturn is never a good thing for property markets in a broad sense, the fundamentals of individual cities and towns at any point in time are always very diverse from location to location.

Australia’s long run of economic prosperity is the envy of the world. Unless you’re currently in your mid-40s or older, you either weren’t born or were school-aged when Australia had its last recession, way back in 1990-1.

But every individual state and territory has been through a technical recession at least three times since 1985.

Even New South Wales, the state which has been able to boast the best state economy over the last five years, was in a technical recession 4-times since 1985.

While we all remember Sydney’s 2013-2017 property boom wherein property prices increased by 70 per cent, most have forgotten that New South Wales’ economy produced 3 out of 4 quarters of declining GDP in 2012-13.

 

Related article: What next for Sydney and Melbourne property markets?

 

A recession is defined as two consecutive quarters of negative growth in GDP.

Today, in spite of an incredibly low national unemployment rate and consecutive years of very impressive job growth, some people are cautioning that an Australian recession is just around the corner.

My personal view is that the underlying fundamentals of Australia’s economy right now are as good as they’ve ever been at any stage for more than a decade. The biggest risk to our national economy right now is the reduction in money filtering through the ecosystem due to (arguably) the tightest credit conditions in Australian history.

 

Related article: Property booms beckon, 2019 Outlook

 

But this period of tight credit is totally self-imposed. Even politicians couldn’t be so silly to allow this self-harm to continue much longer. I, like RBA Governor Philip Lowe, am actually quite bullish about the mid-term outlook for economies across most parts of Australia. But that doesn’t mean that there aren’t economic risks.

What happened during Australia’s last recession?

Australia’s last recession started in the fourth quarter of 1990 and continued for twelve months.

Immediately prior to the last national recession (in the mid-1980s) Australia went through considerable economic reform. The Australian dollar was floated, credit was free-flowing from an earlier banking deregulation, wage growth was very strong, stock markets world-wide were roaring, it was an era of entrepreneurship and confidence was high globally.

Australian property prices had increased significantly during the 1980s. To raise government revenue while also trying to curb property investor activity, the property sector was attacked with the introduction of a capital gains tax in 1985. Six months later, negative gearing was axed before later being reinstated again.

The global financial excess of the mid-1980s came to a grinding halt when Japan and West Germany cranked up interest rates in 1987, triggering stock markets across the world to crash.

A 40 per cent decline on the ASX saw more money being withdrawn and put in to Australian real estate. Many property markets produced double-digit growth.

High interest rates were then employed to slow the property boom of 1988–89. Those same high interest rates placed significant stress on business profits, eventually tipping Australian in to a recession.

During the 12-month recessionary period, national GDP fell by 1.7 per cent and Australia’s unemployment rate increased from 7.4 per cent to 10.1 per cent.

In the 1991 national recession year, there were mild real estate price declines in Sydney (0.7 per cent), Melbourne (2.3 per cent) and Perth (1 per cent). On the other hand, other capital cities such as Brisbane (6.8 per cent) and Hobart (4.3 per cent) produced quite solid growth in their median house prices.

To (once again) remind people that there is much, much more to Australian real estate than eight capital cities, spectacular growth in 1991 median house prices occurred in Rockhampton and Shoalhaven (both 20 per cent), Goondiwindi (19 per cent), Kempsey (18 per cent), and Newcastle (17 per cent).

 

Related article: From ‘gone’ to ‘great’

 

Meanwhile, Mackay (17 per cent) and Tamworth (15 per cent) were also outstanding and Toowoomba, Margaret River, Wagga Wagga and Hervey Bay each had 13 per cent growth in 1991.

It’s always a good time to invest in real estate. The most important question is not ‘when’ but ‘where’.

Over the three years immediately after the recession, the national unemployment rate hovered around 10 per cent, although it was closer to 13 per cent in Victoria and Tasmania.

The year of the recession (1991) and subsequent three calendar years, still saw a cumulative increase of more than 20 per cent in 5 out of 8 capital cities. The above chart also contains examples of non-capital city locations in multiple states that performed exceptionally well.

The moral of the story is that, while a broad downturn on the nation’s economy generally does drag on the overall rate of property price growth, that doesn’t mean that property prices everywhere decline in value.

 

There are multiple factors which affect property prices (federal, state and local). Each individual city has its own unique economic characteristics, different levels of housing affordability, varying levels of housing supply, and a wide range of other local factors that influence buyer behaviour.

 

For those exact same reasons just listed, there will always be strong performing property markets in various parts of the country whenever there are other significant macro changes, such as tax policies (including negative gearing), interest rate rises and fluctuations with the $AUD.

 

Related article: Stick to these fundamentals

 

When did each Australian state go in to recession?

Recession is a period of (temporary) economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

New South Wales was in a technical recession in 1991, 2000, 2008-09 (GFC) and as recently as 2012-13.

From mid-1989 through to mid-1994, the Victorian economy was awful, with GDP growth of less than 0.5 per cent in 16 out of 21 quarters. Horrible! But let’s not forget that Melbourne’s median house price has increased from $133,000 in 1990 to $775,000 thirty years later. Safe as houses!

Queensland produced a decline in GDP in 7 out of 8 quarters to December 2015. That’s only a few years ago but how many of you can recall the recession announcement? No, the state didn’t fall apart!

According GDP data from the ABS, Western Australia has pretty much been in recession since June 2014.

And the Northern Territory is currently in (arguably) the deepest recession that any Australian state or territory has ever seen.

 

Related article: Darwin’s untapped potential

Before the property boom that is still underway in Tasmania today, that state was in recession for the two years leading up to June 2013. For the record, Greater-Hobart’s median house price only declined by 2.6 per cent over that 2-year period!

 

Related article: Darkhorse of Australian property markets

 

 

2x consecutive quarters of GDP decline
NSW VIC QLD S.Aust W.Aust TAS NT ACT
1991
2000
2008-09
2012-13
1990-91
2000
2008-9
2000
2008-9
2014-15
1989
1990-91
1991-92
1998
1999-00
2013-14
1990-91
1991
1993
1998
2000
2012-13
2014
2015-16
2018
1989
1990
1995
1998
2008
2011-12
2012-13
1986
1989
1990
1990-91
1991
1997
2000
2004
2009
2013-14
2015
2018
1985
1986-87
1988
1990
1994-95
1998
2000
2005
2008-09
2014
30-year median house price change [capital city]
$155,000

to

$950,000

$133,000

to

$775,000

$96,500

to

$555,000

$60,000

to

$480,000

$90,000

to

$520,000

$74,000

to

$455,000

$99,300

to

$489,000

$105,000

to

$658,000

What happened to property prices after the GFC?

Even after the Global Financial Crisis hit in late 2008, median house prices still increased in every Australian capital city during the following calendar year, with the exception of Perth (1.6 per cent decline). Lest we forget the cries from several doomsayers that property prices would decline by 40 per cent.

A $50 billion federal government stimulus package had the desired effect of ‘manufactured’ business and consumer spending, including on real estate. Consequently, median house prices increased in every capital in 2010; 7 out of 8 saw growth of between 5 and 12 per cent).

The real property market downturn directly caused by the GFC was not seen until after the stimulus package wore off. Median house prices declined in 8 out of 8 capital cities in 2011. In 2012, real estate prices declined again in 5 out of 8 capital cities.

Described by some as the biggest global economic downturn in the history of mankind, the cumulative decline in median house prices during 2011 and 2012 was less than 15 per cent.

As this chart illustrates, some capital city property markets subsequently rebounded strongly as did markets in various non-capital locations.

 

Things are never as bad as they seem, but it’s only those who get in the game who have a chance to score a goal!

 

Is a recession likely?

I wouldn’t at all be surprised if Australia is in a technical recession inside twelve months from now. National growth in GDP of 0.3 per cent and 0.2 per cent during the last two quarters already means that we’re close to the line.

But, a reduction in retail spending, falls in Sydney and Melbourne property values that are bigger than first anticipated, and continued softening of building approval volumes can all be linked to ONE thing – overzealous credit tightening.

For many, the word ‘Recession’ may sound like a scary term. Whenever Australia does produce two consecutive quarters of negative GDP growth, it’s an absolute given that there’ll be a flood of doom-and-gloom commentary from economists and politicians.

But, as I’ve already mentioned, the underlying fundamentals of our national economy haven’t been better for more than a decade and much of the current data downturn will be reversed as soon as the powers-that-be pick up that pen and instruct a return of sensible credit policy.

A nation that doesn’t make profit for a couple of quarters doesn’t necessarily mean it’s in tatters any more than a solid company having one lean year. At the end of the day, the set of national accounts is a collation of financial results from individual states, cities and towns.

To use an analogy, Woolworths might report a Group profit downturn that was largely a bi-product of a Masters hardware store failed venture. It’s still a great company! Within the Group’s financial accounts are individual business units such as Woolworth’s supermarkets, Dan Murphy’s, Big W, Caltex and BWS.

The performance of the individual economies of each Australian city and town will always be more relevant to individual property market performance than the broader set of national accounts. Decades of factual property market results have taught us that.

At some point in time, Australia’s long-running positive GDP numbers will come to an end. Maybe there’ll be some good to come from shaking that complacency monkey off our back.

Regardless, one that uses doom-and-gloom macro stuff as a reason to sit idle on the sidelines is putting their own potential for future financial independence on hold.

Get in the game. In a country as big and diverse as Australia, there will always be a plethora of exciting opportunities for property investors.

Propertyology is Australia’s premier property market analyst and a multiple award-winning buyer’s agency. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.

Here’s an example of some of our work for a client.

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