The biggest fall in household wealth in Australian history could be the unlikely shield saving mortgage holders from relentless interest rate pain.
Mortgage holders are tipped to be hit by rising interest rates next week, but the sharpest fall in wealth in Australian history may spare them from further interest rate pain.
This is due to the “wealth effect” – when prices go up, people feel richer and are more likely to spend.
The same applies in reverse – when prices of assets such as housing falls, people feel poorer and spend less money, which takes pressure off inflation.
AMP chief economist Shane Oliver said the plunge in house prices was doing some of the RBA’s work for it, taking the pressure off further rate hikes.
"Falling house prices is part of the transmission mechanism. So yes, it makes the RBA’s job easier, but it’s by design – that’s the way monetary policy works,” Mr Oliver said.
"It depresses house prices, people feel poorer, and they spend less.”
Markets have almost completely priced in a rate hike on September 29 while putting about a 45 per cent chance of a second rate hike in December.
There is also a 17 per cent chance of a third rate hike by May 2027.
REA Group figures show the housing market has now entered its fifth straight month of decline, down 0.2 per cent in August.
National house prices have now dropped 2.7 per cent from peak to trough since March, although they are still up 1.8 per cent over the last year.
Experts predict the falls will be more than 10 per cent.
Crunching the numbers, Mr Oliver said the RBA’s own analysis showed just how big a drag falling prices could have on spending.
"Each 10 per cent fall in house prices knocks about 0.8 per cent off consumer spending after six months and over a year or more knocks about 1.6 per cent off consumer spending,” he said.
"If it is a 10 per cent fall, then you’re knocking about 1.5 per cent off consumer spending.
“Consumer spending normally grows about 2 per cent, but you’ve got a drag coming from the wealth effect and it only grows 0.5 per cent.”
Dwarf any other fall in history
Modelling from Primara Research using ABS and ANZ data found household wealth is set to be smashed.
Based on the modelling, falling property prices will strip $1.3 trillion from household wealth.
Currently, national prices sit 3.6 per cent below their March 2026 peak, with ANZ forecasting a national peak-to-trough drop of 10.6 per cent in property prices, with Sydney facing the steepest decline of 14.5 per cent.
The fall in value is expected to be 1.89 times bigger than the global financial crisis (GFC) and 2.14 times bigger than the falls when interest rates jumped in 2022.
Although, as a share of household wealth, it would be smaller than the GFC, as household wealth has tripled from $6 trillion to $19.2 trillion since then.
Primara Research head of research and data Peter Drennan said the size of the shock was unthinkable before 2008.
“But property values have roughly tripled since then, so even a smaller percentage fall now adds up to a bigger dollar loss than the GFC ever did,” Mr Drennan said.
Not part of our agenda
In a grim update for property owners, RBA governor Michele Bullock explicitly ruled out making any interest rate decision that could help or hurt the housing market.
“One point to make upfront here, we don’t target housing prices,” she said.
“We do observe closely what’s going on in the housing market because it is one area that monetary policy has an impact.”
While taking part of the blame for the housing market’s fastest fall in four decades, Ms Bullock said negative gearing and capital gains reforms also stopped investor activity.
“You can see very directly the impact of the tax changes because you can see housing approvals for investors have just dropped,” she said.
“They’ve dropped for everyone, but they’ve really dropped a long way for investors.
“It has changed the dynamic for investors whether it’s worth them investing in housing or not.”
However, Ms Bullock said house prices had surged since the beginning of Covid and were now coming down from “a very high base”.
“At the moment, if you look at how it’s correcting relative to other corrections, and the downturn is sort of in the lower range of downturns in the past, but it’s certainly not out of the ballpark of the sorts of downturns we’ve seen in the past,” she said.
