Property crash? Unlikely, but if Joe Hockey’s right, watch out Australia

My friend, Sophie, (not her real name, obviously) was downcast. She and her ex-husband had sold their house for a substantial profit. But she wasn’t thinking about what they had made. She was thinking about the substantial discount on their reserve and pre-sale valuation that they had had to accept. An actual windfall had turned into a feeling of loss.

The wealth effect of the property escalator moves both ways. For those having to sell now, there is little pleasure in the long-term gain, only pain from the short-term perceived loss.

It’s a peculiarly Australian variant on human nature to feel robbed on a profitable house sale. Sophie felt like she’d had her retirement savings gutted. She was looking for someone (in addition to her ex-husband) to blame.

Australians have $12.8 trillion tied up in residential property, according to the Bureau of Statistics. They have more wealth in their personal bricks and mortar than in their super, stocks and commercial property added together. Owning real estate is the lazy person’s way to feel like an investment genius. Buy a residence, sell it, gear up, buy, sell, climb the ladder, pay zero tax, be happy. All you’ve done is enjoy your home, and somehow you’ve made yourself wealthier. The more than 10 million Australians who are in this game would be forgiven for thinking they’re pretty smart. It’s the Australian dream – or the Australian entitlement – to sit on your couch and feel your home making you richer.

The wealth effect of rising property prices has powered Australia’s consumer economy since at least the 1990s. Australians rank second only to the Swiss as the most heavily mortgaged population on Earth. So large are Australians’ mortgages, they are paying more interest on home loans now than in 1990, when rates were close to 18 per cent. While values were rising, it didn’t matter that your wealth had increased only on paper and that if you sold, you had to buy into the same market; what mattered was that you felt richer. You could fund a more consumerist lifestyle by refinancing your mortgage. The great Australian dream was your magic pudding.

Now the property market has reversed, we are beginning to countenance the negative wealth effect of owning a house. Somehow, the paper loss makes you feel much worse than the paper gain ever made you feel good.

Cry me a river? First-world problem? Sure, but to deny the emotional impact would be to miss a ripple effect that will change Australia in unexpected ways. The victims of the property affordability crisis, those shut out from our great Australian pyramid scheme while it kept compounding, seemed somehow theoretical to the 10 million owners. We all wanted cheaper house prices – just not our own. In a downturn, on the other hand, the victims are personal. They are the older, formerly comfortable and complacent holders of the $12.8 trillion. Like Sophie, they will be looking for someone to blame.

The federal government is a convenient scapegoat for having had the impudence to demand property investors – future ones, not the millions protected by grandfathering – pay the full rate of capital gains tax on their inflation-adjusted capital gain. Anyone trying to sell a family home in a capital city has known that the downturn was under way long before the tax changes, and long before US President Donald Trump’s follies.

The trigger was the run of interest rate rises since 2022 and the natural gravitational limits of the scheme when the average house price reached 14 times the average Australian income. Around 2023, it started to become too expensive for new entrants to keep blowing air into the bubble. The banks wouldn’t lend enough for them to turn home ownership into a game of pure speculation; that all-important wealth effect that politicians since John Howard have assumed is the key to Australians’ hearts began to collapse under its own top-heaviness.

Customarily, when buyers flee the market, prices stabilise because sellers flee, too. That’s what is happening now, papering over the actuality. Analytics firm Cotality released figures this week showing auction clearance rates falling into the low 40 per cent range. This historically low rate underplays the reality because it doesn’t show all of those who abandon plans to sell before they reach auction time. If there is one faithful guide to how sellers and buyers are both evaporating, it is the frequency of calls you get from real estate agents touting for business. Those messages have been running hot for a while now.

That is all very well if we are not, en masse, forced to sell. If unemployment remains low, the market finds its new equilibrium. But if job losses or other unforeseen crises force people to sell, watch out, Australia.

For the past 30 years of residential real estate speculation – sorry, entrepreneurial wealth-building – if unemployment goes up, the Reserve Bank can bring interest rates down and make it easier for home owners to hang on. But an actual unemployment recession such as that recently predicted by former federal treasurer Joe Hockey, who said artificial intelligence could send the jobless rate to 15 per cent within the next five years, would spell property Armageddon by turning paper losses into real ones. Or if they’re not long-term losses, as in Sophie’s case, they will feel like they are.

Contemplating a negative wealth effect from falling house prices is a venture into unknown territory for most because it hasn’t happened in Australia for a generation. The crocodile tears shed for shut-out younger generations will be nothing compared to the real tears shed by property sellers for themselves. And you thought you already lived in an angry world.

Although Opposition Leader Angus Taylor’s question to the prime minister in parliament on Wednesday, asking him to guarantee house prices wouldn’t fall, was absurd even by his standards, his sentiment taps into Australians’ most potent fear. Taylor’s Liberal Party probably doesn’t have the appeal to benefit from this, but we know someone else who does.

All the other impulses towards populist parties like One Nation are chickenfeed compared with a widespread negative wealth effect from falling house prices. Alan Kohler wrote in his excellent 2023 Quarterly Essay, The Great Divide: Australia’s Housing Mess and How to Fix It: “It will be impossible to return the price of housing to something less destructive … without purging the idea that housing is a means to create wealth as opposed to simply a place to live.” It was true then, even truer now, but the pain of adjustment will have profound and unpredictable consequences. If 10 million Australians are feeling like the value of their main asset is going backwards, just watch how few of them accept that this is a good thing for their grandchildren.

Malcolm Knox is an author and a regular columnist.

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