Can Australia's property market survive a price fall?

The trigger? Signs the nation’s red-hot housing market of the last few years was starting to cool.

"Homes were getting passed in or being sold in our range," Landry says. "There are opportunities in the market."

It's a bullish sentiment built on an often deep-seated notion that property downturns are nothing to be feared for long-term buyers. Indeed, they are to be expected and seized upon.

Sydney's market has had eight slumps since the mid-1980s, with the most recent episodes between 2004 and 2006, as well as briefly in 2015, generating falls of between 3 and 8 per cent.

Upward march

"Now is the time to jump up," says the Munglys' buyers' advocate Julie DeBondt-Barker, the director of agency Buyers Home Base.

"If you're quick you can cash in on the good equity you've made over the last four to five years and take that equity to move yourself closer to your desired location or your dream home."

Few people have had cause to genuinely question such advice. Strong population growth, a dearth of well-located homes near jobs and transport infrastructure, as well as ultra-easy monetary policy and a tax system that elevates home buying over pretty much any other form of investment have kept prices rising over the long run.

The "wealth effect" from all this price action has been considerable. It has inoculated Australians from much of the pain caused by the end of the resources boom.

Figures published by the Australian Bureau of Statistics this week show the average person has net assets of just over $410,000 – a large proportion of that derived from a housing market valued at $7.6 trillion.

While the bureau's measure of per capita wealth fell in the March quarter for the first time in two years, it's still nearly $100,000, or 36 per cent, higher than it was five years ago.

But is all this breezy confidence justified? Is the current period of falling prices a temporary dip, or does it foreshadow something else more dramatic? Is the long bubble about to turn into the cataclysmic crash so frequently forecast by the doom-mongers?

Continuation of slowdown

Homes in the Victorian capital dropped 1.2 per cent in value over the three months to May, while they shed 0.9 per cent over the same period in the NSW capital.

The sharply turning residential markets across eastern coast Australia have caught out developers in Sydney, caused foreign investors in Brisbane to take a 28 per cent haircut and triggered economists at SQM Research, HSBC, Macquarie, ANZ and UBS to tear up their predictions of growth and replace them with expectations of price falls or, at best, anaemic growth, in the country's two largest cities.

It's a sharp recalibration of expectations driven by tighter curbs on credit that were first driven by banking regulator APRA to slow investor activity in Sydney's white-hot market, backed up by Chinese restrictions on the export of capital by its own citizens and more recently reinforced by banking royal commission revelations of dodgy lending practices that have caused lenders to become even more conservative.

Weekly auction clearance rates have collapsed in Sydney and Melbourne to well below 50 per cent from a very peaky 80 per cent rate a year ago.

Investor activity has contracted sharply, and the fallout is on display.

Post completion and 21 of those units remain unsold. Sales director Jay Carter said the company would be hanging on to those units and intended to sell them gradually over the rest of this year to protect margins. "We can afford to hold the last few sales to protect values."

In other words, no need to panic.

Unwelcome portents

But for a rising number of Australians the portents will be very unwelcome.

Those who bought in the latter stages of the boom could soon be facing negative equity. Despite banks increasingly forcing buyers to put down larger deposits to satisfy the concerns of regulators, falling prices mean their homes may already be worth less than they borrowed.

Underlying all of it is the vast run-up in household debt – which has ballooned from around 160 per cent of disposable incomes less than 10 years ago to almost 200 per cent – a near world record.

Updated figures published by the Reserve Bank this month show no signs the increase has abated, supporting those who say monetary policy is still too loose.

Former Reserve Bank board member Warwick McKibbin told The Australian Financial Review this week that it was past time for the central bank to begin preparing households for higher interest rates.

"If the argument is 'we can't raise rates because if we do we could make the housing market a lot worse', or prick some other asset bubble and cause a shock – if that's the problem – it's better to raise rates now than wait six months," he says.

Other monetary policy experts agree, including Monash University economist Mark Crosby and Sydney University's James Morley.

"They keep delaying and finding reasons not to move up," Crosby says. "Whereas my view is it's safe enough to do so and the more you delay, the more imbalances build up."

"This is just an unhealthy level of interest rates at the moment."

Their calls for higher rates are still in the minority – most central bank watchers aren't expecting a Reserve Bank rate hike before 2020.

Indeed, there are emerging concerns that the money markets that fund – and therefore dictate – how much Australians pay for mortgages may be in the early stages of a major shakeout.

Losing control

In developments that some experts say imply the Reserve Bank could be losing control of its primary interest-rate setting mechanism, many banks are already being forced to pay more for the money they lend households.

Smaller lenders like Bank of Queensland and AMP Bank this week announced plans to hike their mortgage rates by up to 40 basis points while ME Bank upped rates in April. Bigger lenders are facing the same pressures, but may be reticent to draw attention through mortgage rate hikes amid the banking royal commission.

The causes of the spike are complex, but they include global changes such as Trump administration tax change that penalises Apple, Google and Facebook for lending to the likes of Australian banks.

Peter Sheahan, director of institutional markets at fixed-income intermediary Curve Securities, likens what is happening in money markets around the world as the US Fed unwinds its crisis-era monetary policy stimulus to the late 1980s, when Australian farmers and corporates ran into serious trouble borrowing low-interest rate Swiss francs without hedging the currency.

"We are seeing another period in history where it proves to be dangerous to borrow too much money in a foreign currency," he says. "The adjustment phase can be seen in our own domestic funding problems that are emerging."

"The global binge on cheap USD finance is our modern-day foreign currency debacle," he says.

Much of this is likely to play out in coming months, say money market experts, coinciding with more negative headlines out of the nation's biggest property markets as prices drop.

A big unresolved question for state governments, regulators and the Reserve Bank is whether these adjustments lead to a wider panic.

That has always been the Reserve Bank's biggest concern throughout the whole post-GFC cycle; that an eventual fall in property prices that were bid up to unsustainably high levels topples consumers into a defensive crouch.

Given their spending accounts for the equivalent of around 60 per cent of the economy, such a slump could become the doom-loop that drives a rise in unemployment, which sends a rising number of households into default and forced into selling homes in a falling market.

None of those things are happening today.

Reasonably orderly

So far the price reversals that have happened have been reasonably orderly.

Something of an analysts' consensus has congealed around the idea the peak-to-trough price fall will be no more than 10 per cent.

A key reason is that the nation's fast-growing population still doesn't have enough homes – Stephen Anthony at Industry Super Australia estimates the national shortage at around 350,000 dwellings, even after the recent surge in unit construction of the past three years.

That shortfall could worsen – deepening the supply shortage – if investors continue to withdraw. Figures published on Friday by the Reserve Bank show annual growth in investor credit slowed to 2 per cent in May, the weakest in records dating back to 1991.

Like any market, property has its cycles and Landry Mungly is already looking to the next opportunity.

"I'm hoping in four to five years we will be able to sell in Mulgrave at a profit again to move in closer to the city," he says.

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