If you feel poorer when house prices fall, you tend to spend less. That wealth effect is front and center in a Thursday note from HSBC's Paul Bloxham, who lays out how a softer housing market can slow the broader economy. He also flags fewer homes changing hands, weaker construction, and tighter state budgets as the other transmission lines from property to growth.
HSBC estimates that when home values drop by 5%, household outlays typically ease by 0.8% across two years. On the bank's call for a 13% peak-to-trough slide in prices, that translates to roughly a 1% reduction in gross domestic product over time. Past cycles back this up: during 2017 to 2019, slower housing turnover clipped about 0.4 percentage point from annual GDP growth, and residential investment shrank by 18%. Data from Cotality and Bloomberg Economics show turnover has slumped, a pattern that lines up with additional price softness.
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Governor Michele Bullock has been clear that the Reserve Bank of Australia's three rate increases between February and May were designed to cool activity and bring price pressures to heel. Economists and traders think the RBA may lift rates again as early as later this month, which would take the cash rate to 4.6% and add to the downward pressure on property values. The RBA has also noted the economy's capacity constraints are stoking prices. As Bloxham puts it, "The overall weakening of growth will help the RBA to get inflation to head back to target," adding, "In a supply-constrained economy, an economic downturn is needed to get inflation to fall." The central bank has been working to pull underlying inflation to the 2.5% midpoint of its band for nearly five years and now sees that happening only in early 2028.
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