Housing downturn will weigh on activity before long

Australia’s house prices are now falling at a similar rate as they did during the 2017-19 downturn, which was the largest in the country’s modern history. Home sales remain well above pre-pandemic levels, building activity is holding up and construction firms are upbeat about the outlook for their industry. However, if the RBA hikes interest rates to 3.6% as we anticipate, housing will become the least affordable since the global financial crisis. As a result, home sales and prices will continue to fall, which will make it less attractive to build new apartments. And with houses accounting for a record share of housing wealth on the eve of the current downturn, falling housing wealth will weigh on consumer sentiment. Finally, the spending categories that have seen the largest increase since the start of the pandemic are the ones that are most sensitive to changes in house prices and will therefore come off the boil. The upshot is that GDP growth will slow to a crawl next year.