How Badly Will Australia Property be Affected by Downturn?

The Australian Reserve Bank has said that the quality of the loans underpinning the property market will keep it from being as badly affected as those overseas, even though Australia's economy is currently in a worsening slump, reports The Age.

RBA deputy governor Ric Battellino said in a speech to the Urban Development Institute of Australia in Brisbane:

"We continue to believe that the market here will hold up better than overseas. There are a number of reasons why this is likely to be so, but perhaps the most important is that we did not have the same deterioration in lending standards that occurred elsewhere."

However, the Federal Reserve has also admitted that Australia is now in recession, and a report in today's Age shows that unemployment is now expected to fall to 7% this year, according to senior federal minsters and heads of industry.

The Australian property market is bound to suffer as unemployment spirals. However if as the ARB says, the banking sectors isn't crippled as it is elsewhere, it likely will not be as badly affected as the UK and US.

None the less price drops are highly likely. The rising unemployment will lead to fewer people buying property, which will lead to price drops. If the recession leads to many people selling second homes and investment properties bought during the boom the price drops will likely be quicker and more severe. This is because those sellers will be desperate to sell, and will attempt sharp drops in prices in order to achieve sale before buyer numbers drop any further.

The rising unemployment will undoubtedly lead to rising repossessions, despite the healthy banking sector allowing banks to be more flexible with struggling borrowers; unless the economy improves quickly flexibility will eventually lead to foreclosure.

Rising repossessions reduce faith in the market, make it yet harder to sell property, and put further downward pressure on prices.

In closing: Australia property is likely to see quite a significant price correction. However the healthy banking sector -- if it translates to readily available and competitive mortgage products -- will prevent the correction from being as bad as the UK and US. It will also mean that once the economy starts to turn around and/or the property market bottom out -- whichever comes first -- Australia's property market will almost certainly see a V-shaped recovery.