Could Australia's housing downturn push the economy into recession?

Australians have watched the value of their homes soar for years. Now, as prices head in the opposite direction, there are warnings the fallout could spread well beyond the property market.

Property developer Nigel Satterley has warned Australia could face a "full-blown recession" if the housing downturn spills into consumer spending, as falling property values leave households feeling poorer and less willing to spend.

The Reserve Bank of Australia (RBA) has pushed back on those fears, acknowledging the downturn will slow parts of the economy but saying it does not currently expect a recession.

Which poses the question: How worried should Australians be?

Independent economist Saul Eslake agrees with the RBA that the housing downturn is likely to slow economic growth, but says falling property prices alone are unlikely to be enough to push Australia into recession.

"I don't think a decline in property prices of the orders of magnitude that people are now talking about ... that is to say, maybe of the order of 10, perhaps in some cities 15 per cent over a one or two-year period, I don't think that on its own would precipitate a recession," he said.

"It would certainly contribute at the margin to some slowing in economic growth."

AMP Chief Economist Shane Oliver also believes a recession is not the most likely outcome, but sees a greater risk that the housing downturn could contribute to one if prices continue falling and the broader economy weakens.

"Recession isn't my base case, but the risk is significant," he said, putting the probability at around 30 per cent and rising.

Why falling house prices can affect how we spend

At the heart of the concern is something economists call the "wealth effect".

Put simply, when the value of an asset such as a home rises, people can feel wealthier and become more comfortable spending. When its value falls, the opposite can happen.

Oliver said previous RBA analysis suggested a 10 per cent fall in house prices could reduce consumer spending by about 0.8 per cent after six months and 1.6 per cent over the longer term.

That matters because household consumption makes up a significant portion of economic activity.

"If the economy is weak enough to start with because of higher interest rates and other things, then that could potentially knock us into recession because the consumer is about 60 per cent of the economy," Oliver said.

But Eslake said the relationship between property values and spending was not necessarily straightforward.

For most Australians who own only the home they live in, he said its value was largely "paper wealth" unless they sold.

If someone is selling to buy another property, falling prices also mean the home they are moving into is likely to be cheaper.

"So they're not necessarily worse off in a real or tangible sense," he said.

Earlier this week, RBA assistant governor Sarah Hunter also said the impact of falling house prices on consumer spending was likely to be relatively small.

What about Australians who recently bought?

Both economists pointed to negative equity as a potentially greater concern for some recent home buyers.

Negative equity occurs when the amount someone owes on their mortgage exceeds the value of their property.

Eslake said that position only becomes a tangible loss if someone is forced to sell, for example, because of unemployment, relocation or a relationship breakdown.

But simply knowing they are in negative equity could also cause households to cut spending and pay down their mortgage faster.

Oliver said recent buyers were likely to be particularly sensitive to falling prices.

"If you paid $1 million a year ago [and] it's now worth $800,000, you may not feel so happy, particularly ... if your mortgage is worth more than the value of the house," he said.

Could it spiral into something worse?

Oliver told SBS News that retail and consumer spending would probably be among the first places a more serious housing downturn would become visible.

In a worst-case scenario, falling property prices could make households spend less, hurting businesses and employment.

Higher unemployment could then leave more homeowners struggling with mortgages and put further downward pressure on property prices.

"You get this downward spiral, where falling house prices lead to a loss of wealth, leads to less spending, which leads to higher unemployment, which in turn leads to further falls in house prices," Oliver said.

But neither economist believes Australia is there yet.

The latest national accounts show the economy grew 2.1 per cent over the year to the June quarter, while Eslake pointed to continued employment growth and an unemployment rate of around 4.5 per cent.

"I can understand quite a significant proportion of the population will be feeling financial difficulty, pressure or stress," he said.

"That's not the same thing as a recession, and I don't think we are on the brink of one at the moment."

What are the warning signs?

Oliver said Australians should watch whether house price declines accelerate, followed by weakening household spending, fewer job vacancies and eventually rising unemployment.

Eslake similarly nominated employment, job advertisements and business confidence as important indicators.

Both also said a recession would likely require something more than falling house prices alone.

Eslake said another two or three interest rate increases over the next six to nine months would increase the risk, while an external economic or financial shock could also push Australia closer to recession.

Oliver said the RBA also had the ability to change course if conditions deteriorated significantly.

"If it looks like a property downturn could drive a recession, they could quickly ... refocus from worried about inflation to worried about recession and higher unemployment," he said.

For now, Eslake believes some of the dire warnings should be treated cautiously.

"I think some of the people in property interests are talking their own book."

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