The 'Catalyst' Myth

According to any number of property pundits, experts and spruikers here in Australia, house prices will not crash because, in order to do so, would require some kind of 'catalyst'. The GFC came and went without incident, so if that doesn't prove how solid the market is here, then what does? The pundits have decided amongst them that only a spike in unemployment can threaten the rampant progress of the property market in "The Lucky Country" -- and look where that is: 5% and declining ...

As discussed in a previous blog, this is a complete myth. The U.S. housing market started declining when unemployment there was at 5% i.e. there was no real catalyst -- at least not from unemployment. Unemployment started to spike at least 18 months after the housing peak. While it's intuitive and possibly correct to suggest that a large increase in unemployment could cause a housing correction it's equally feasible that it works the other way round, and here is how:

I'll use Australia as an example because I believe that, if there is a sharp property market correction here, then this is exactly how things will play out. The Australian consumer is already stretched financially -- many have large mortgages to service, inflation in food and energy is rampant and pressuring already stretched domestic balance sheets, interest rates are high (relative to other developed world countries) and this has led to sales in discretionary retail and services falling off a cliff in recent months. Australians are, quite rationally, shopping abroad (on the internet) for non-food items because domestic goods are way too expensive. If there is a crash, or a severe correction, in property prices, something will have to give because already weak retail sales will all but evaporate as people batten down the hatches and horde their cash in case they need it sometime down the line to assist with non-discretionary spend and their mortgages. This HAS to lead to large-scale redundancies across the non-resources sector - and the mining sector simply cannot and will not mop up all this excess labour. Unemployment, therefore, will rise as a result of a weaker property market.

As an aside, I just hope the Chinese economy is still cranking when this all happens otherwise you'll see unemployment in double figures in the blink of an eye and a falling housing market will turn into a wholesale meltdown. You know the old adage: the higher you go, the further you have to fall.