LF Economics founder Lindsay David just predicted that house prices in Sydney and Melbourne are about to see the worst crash since the 1890s.
David specifically warned us that they ‘could halve’.
So, is he right?
Well, we don’t have a crystal ball that can tell us the future.
But we do have the history books. And the lessons contained within…
When it comes to trends in the housing market, it can pay to look at the lessons from history. Not just here but abroad too.
I mean, what does an actual housing crash even look like?
Luckily for us (and unluckily for the home owners in these countries), there’s no shortage of examples we can look to.
Japan in the late 80s or Ireland in the GFC, for example. You might’ve looked at both.
But perhaps a better example for Australia comes from Finland.
Let me explain…
End of the good times
Finland was absolutely obliterated when its housing bubble of the late 1980s began to burst in 1990.
The economy was dragged down with it.
GDP fell 14% in two years. Unemployment rocketed to 20% by 1992.
The impact on Finland’s economy was enormous.
Lots of SMEs (Small to Medium Enterprises) went bust as the banks pulled back on lending.
It’s an oft-overlooked fact that small businesses, more often than not, use the family home as a way to finance their cash flows and invest in their businesses.
Some people ended up in debt for over 25 years, despite selling everything they owned.
Like Australia, Finland’s homebuyers had recourse loans. Which meant they had to find a way to pay it back or lose everything.
There was no posting the keys in the mail to the bank like what happened in the US during the GFC thanks to many loans being non-recourse.
And in that environment, house prices fell around 50%.
Is Australia destined for the same fate?
How the current situation in Australia compares
The parallels shouldn’t be oversimplified. Finland was a developing country until the 1960s and remained capital poor until the boom in the 1980s.
But on the other hand, there were some striking similarities.
Finland’s property bubble grew on the back of easy money and a surge in trade with its huge neighbour Russia in the 1980s.
Then suddenly the banking sector tightened up its regulation just as the Soviet Union collapsed.
A double whammy that smashed property prices.
The analogy here would be Australia’s financial sector tightening up on the back of the Banking Royal Commission and any slowdown in Chinese growth.
Make no mistake, if China goes down, we sink with it — especially housing.
But what’s the basis of Lindsay David’s prediction?
It’s a bit more technical than the above…
The debt accelerator
Well, he uses something called the ‘debt accelerator’.
It’s basically the growth in mortgage debt which he says is strongly correlated with house price growth six months ahead.
Latest data indicates the debt accelerator is ‘falling sharply’ in Sydney and Melbourne.
Mr David said, ‘I wouldn’t be surprised by falls of at least 40 per cent. When all hell breaks loose you’ve only got so many buyers out there.’
Right now, national house prices are only down about 6%.
But as per the report, there’s certainly room for deeper falls.
Of course, the bright side of this outcome is that house prices would become very affordable once again.
This would give younger generations more leeway to enjoy the ‘Australian Dream’ of homeownership — provided there are any jobs!
Because for the economy, it could spell out recession.
If David and other analysts (including one of the world’s major credit ratings agencies) are right, Australia will see the world’s biggest decline in house prices this year.
As with any housing bubble, what goes down must come up again. So, it’s really at this stage just a matter of timing. Japan, Finland, Ireland, the USA…all have suffered steep falls in recent history.
Australia has held up comparatively well so far.
But nevertheless, Australians should prepare themselves. Simple things like paying down debt or building a savings or equity buffer.
Because if David’s report is right, as the report’s title suggests, it could be time to ‘Let the Bloodbath Begin’…
Contributing Editor, Money Morning
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