Recession Is Here! What Will Happen To Australian Real Estate Prices?

It’s been a pretty scary week, especially if you’re invested in stocks and crypto.

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Global markets are beginning to feel the pressure from all those interest rate hikes. We're starting to see cracks in the system, and now it's affecting you directly because:

• You might be invested in Exchange-Traded Fund (ETFs) or shares; and
• You might be looking at your super balance and noticing it has declined quite a bit over the last few days.

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Let's make sense of this and relate it back to real estate because that's the next thing people will start worrying about.

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I want to explore:

• What's happening; and
• Why interest rate cuts are on the table.

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For the past few months, I've been saying that things aren’t looking all that pretty. There have been underlying issues, and at some point, a switch was going to flip—and it seems like it has happened now.

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So, if you're interested in hearing my thoughts, definitely keep reading.

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United States Recession and Australian Economy

For someone like myself, who’s pretty logical about markets, when I go online and see all these articles saying:

• “We’re going to have a war”
• “We have global conflict”
• “Markets are crashing”
• “It seems like the recession is here, and everyone’s screwed,”

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It does shake me a little bit.

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It shakes me for about one second, and then I’m back to doing what I need to do because I always try to prepare for both scenarios:

• If the market comes crashing down, what plans do I have?
• If the market continues booming, what are my plans?

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This is the approach you need to take. This is why having a robust strategy, rather than just saying, Hey, here’s my acquisition plan. I’m going to buy this every single year, and this is how I’m going to do it, is essential.

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That doesn’t really work in a dynamic market like the one we have right now.

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So, let's make sense of:
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Why?

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Because you might be surprised by what the economy could do versus what the market could do.
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The economy can tank, and the markets can die. (I don’t know how you’d both tank and die, haha.)

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However, it could be quite serious on the markets front. Equally, you could have the economy looking tragic, but the markets could stay irrational longer than you can stay rational.

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With that, let’s dive in.

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The latest data from the US suggests that unemployment is going up.
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The jobs data isn’t looking good, and therefore, we’re likely to see a recession.
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Because of this, we need to see rate cuts immediately. Now, all the market makers are suggesting that the Fed is going to cut rates multiple times in 2024.

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So, the next question is: okay, well, that’s what the US is doing. How does that affect Australia?

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One of the things to consider is:
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I’m going to try my best to simplify this and not make it boring before I get into real estate prices.

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Think of it like this: The Federal Reserve System (FED), which is basically the central bank equivalent to the Reserve Bank of Australia (RBA), controls interest rates.

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They might say, “Okay, we need to cut,” and it looks very likely that they will do that at the next meeting in September.

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So, if they cut their interest rate, it means their currency becomes weaker relative to ours, because we've stayed strong.

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If we don’t make the same cuts that the US makes, what will happen is:
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If you think about it with bonds and yields and other jargon, it just means that if our interest rate is at 4.5% and they’re reducing theirs, foreign money will flow into countries like ours because they see a better return here.

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The flip side could also happen. We’ve seen this before when our interest rates weren’t rising as fast as those in the US, which is why we’ve seen the AUD be really weak relative to the USD.

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In times of turbulence and volatility around the world, people move to safety, which usually means going back into the US dollar.

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That’s as much as I’ll cover on currency. I’m not an economist, and I won’t pretend to be one. I do love this stuff, but I try my best to only share what I think is relevant and simple to understand. Otherwise, I’d turn into an economics channel, and honestly, that’s boring.

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So, let’s continue…

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Previously, I published a blog where I talked about the RBA and why they should start cutting rates.

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This was before we had this global catastrophe in the markets and when we saw the US release their job numbers.

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I said: “Hey, guys, we have a problem here. We’re in a retail recession. People aren’t spending as much money as you think they are, and although inflation looks high, it’s actually trending down. We don’t want to make the same mistake we made when it was going up as we are on the way down.”

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However, what we're seeing now is disinflation in progress.
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In this graph, what we see in the blue line is the headline CPI.
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In red is the Melbourne Institute headline monthly inflation gauge annual percentage change.
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Now, what we are seeing is a 31-month low in that number, and what's interesting is the rate at which things change.
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The reason why it seemed likely that interest rates might have started to move up—and why it looks like the RBA may have made a mistake—is that around 2020, interest rates were at record lows. 
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But then we started seeing inflation rise a little higher toward 2021. At that point, it was still like: No, inflation is not a problem. The economy is weak; we need to keep interest rates at record lows.
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What they should have done was: 

• Increase rates at a slower pace: go up a little bit;
• Wait, see what's happening;
• Assess the market; and 
• Move in a more sustainable manner 

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However, since they were behind, they started increasing interest rates rapidly, and that’s what sent shockwaves through the economy.

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As a result, what we saw was the better part of 2021 and 2022. 
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Inflation kept rising along with interest rates, and that's when people thought the monetary policy was broken. It was like: Hey, interest rates are going up, but inflation is also going up. How are we going to control inflation? Oh my God, we're screwed.

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That's why we saw interest rates continue to rise throughout 2022 and into 2023.
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Now, when we reach the peak around 2022 to 2023, all we've seen since is a decline—a disinflation. Inflation is still present, but at a lower pace every single month, so it’s trending down.
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What we can see is that if we flipped this, it would have just looked like the earlier period.
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If you think back to that period, with hindsight, you would probably say: It makes sense to have increased interest rates very slowly.

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Well, why are we thinking any differently now?

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What we're going to see in this next phase, according to all the data out there—and people much smarter than I am saying—is that if we start cutting interest rates, they’re going to have to cut them quickly if they want to see any sort of effect.

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If they want to do it sustainably, and they say: “Oh well, okay, 25 basis point cuts at Christmas, and everyone's happy because interest rates are going down,” it’s actually going to make no difference. It would mean that we would have to see cut after cut after cut to see a significant impact on the inflation number.

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Now, why is inflation important? Well, because all of these economies around the world operate on debt. The debt that you and I carry for our home loans may sound like a lot. However, when you start seeing how much debt each country carries, they need inflation in the system because:
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This is so tough when it comes to you spending money at the grocery store. We’ve all used the example: “I could buy so much with my $100; now I buy nothing.”

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Well, the same thing happens, but the benefit to someone who holds debt is amazing.

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Why? If you think about it, that $100 worth of debt five years ago is not worth $100 of debt today because generally, what we’ve seen is people should be making a lot more, everything costs a lot more, but your debt is still denominated in the dollars it was denominated in five years ago, so it’s still 100 bucks.

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A perfect example of this is why house prices were like $100,000 for a house in Sydney 40 years ago. The debt on that would be $80,000.

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If you never paid a single cent off, today in 2024, you would say: “$80,000? I could knock that off in like a year or two.”

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This is exactly how things play out when it comes to inflation and debt. That’s why it’s important to have inflation.

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Now, inflation in the economy means that some things are going well; we’ve got GDP growth, it’s a healthy economy, and things are heading in the right direction.

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It’s often like when you think about taxes.

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If you say: Oh, I’m getting taxed a lot, it means: Hey, I’m actually making money.

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This is the same sort of thing with interest rates. When interest rates are high, it’s because the economy is growing, and it needs to be sustainable growth, so that’s why the interest rate is a bit higher.

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When interest rates are low, it’s actually because the economy isn’t doing much, and they need to artificially stimulate something in that economy.

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We’ve already seen what happens when the government gets involved in free-market forces.

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Effects of Recession to Australian Property Prices

Now, the other thing I wanted to show is what happens to Australian property prices during a recession.

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The big focus here is that we’ve seen interest rates go up for a long period, and now we're starting to see certain indicators where the RBA itself may suggest that interest rate cuts are around the corner.

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However, at their latest meeting, they said nothing about interest rates. In fact, they mentioned that cuts were still far off, which is very reminiscent of when Philip Lowe said: “No, no, we’re not going to have interest rate hikes for another three years,” yet in 2021, interest rates started going up.

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This is why I'd be very cautious about how I interpret information from mainstream media.

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If you've been following mainstream media for the last 3 or 4 days, some really positive people around me have started feeling depressed because they're thinking: The world's ending. I don't know what's going to happen.

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This is what you should try to avoid—it’s just white noise.

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If you tune out what's happening out there and focus on your strategy, you can say: Okay, cool, I've taken the information I need, but only what I want.

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That is the key.

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If you're volatile in your own emotions because you get triggered by what people are saying or what you see online, you need to control when you actually engage with that sort of information.

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The RBA Tracker

Now, I'm going to show you a website that I think is so important and something that you should all learn about—the RBA rate tracker.

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What is the RBA rate tracker?

There’s a lot of jargon there, but all it suggests is:

• Whether they think interest rates will go up, or
• Whether they will go down.

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You can check this out for yourself, but what you’ll notice is the date and the percentage of “no change.”

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Beside “no change” would be either a decrease or increase to the next target. What we've seen is that from July 26, it was 0%, up until July 31, when they started thinking there’s a 30% chance they could decrease to 4.1%.

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This indicates about a 25 basis point cut.
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We can also see that the numbers go up to 100% as of August 5.
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If we had a meeting on August 5 and this was what the RBA was basing their decisions on, it would mean they would cut.

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This shows how close we are to an actual cut, despite what the RBA is currently saying.

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Since then, it’s come down to about 50%.

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I suspect that we're not going to see a cut until much later this year, likely just before Christmas.

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Another thing you can see is the ASX 30-Day Interbank Cash Rate Futures implied yield curve.

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This suggests a forward-looking approach on where they think interest rates will be over the next 18 months.

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What this indicates is that by January 2026, we should see rates about 100 basis points lower than where we are today.

Take this with a grain of salt because it fluctuates a lot. Depending on the day you check it, it might be higher or lower, so you can't bank on this—not even the Reserve Bank of Australia would bank on it.

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If we do see a downturn, interest rates might be cut, and unemployment could go up, so we’d likely see more cuts to stimulate the economy.

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But what happens to property prices?

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Is this still a good time to buy?

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If not, when should you be buying?

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Well, here's a graph that shows the periods between market peaks over the last 43 years, and the average is 4 years.

Let me break that down and focus on two things:

• What happens to property prices during a recession, and
• When we think markets will actually peak.

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If you look back at 1981 to 1984, it was a period of 4 to 3 years.

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The next peak was 4.5 years later, followed by 4.25 years later, then 4.75, and so on. 

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We also see the market from 2002 to 2008, which was 6 years, being the next top.

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These red bars suggest not the price of the property, but the percentage gain the properties actually had.

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Although the peak here in 1993 looks much lower than in 1989, it’s not that prices went down during that time. It’s just that the percentage change was a lot lower during this period in 1993 than it was in 1989. 

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Now, let’s move forward to where we are now.

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We saw the last peak in March 2022, which was 4.5 years after the previous peak.
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Mind you, these are averages, so it could be 3 years, it could be 7 years—nobody really knows. But if we use an average of 4 years from now, we could probably see the peak in real estate prices in March 2026—a number that would also line up really well with the 18.6-year cycle.

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Final Thoughts

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Now, in my personal opinion, based on everything we've seen so far and what is about to come in this next phase, I think prices will likely peak closer to 2027 or 2028.

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So, if you're thinking, "Oh well, the market's going to collapse in 2028," then today is still a good time to buy.

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If you think the market is going to crash tomorrow, you might believe this is the worst time to buy, and you might even want to sell.

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Now, you can see how this becomes really dangerous without a strategy.

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The other thing I wanted to point out is what happens when we do see an economic downturn.

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What we can see is that during the GFC, many areas only experienced 5% to 10% declines, which were quickly followed by massive levels of growth. We can see that here in 2009 and 2010 when prices were growing by about 10%

We also saw this in 2019—just before the lockdowns—when the after-effects of APRA’s changes to banking regulations and tighter credit policies caused prices to decline even further than what we experienced during the GFC.

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For a period in 2023, we did see prices in Sydney and Melbourne decline, but then we started to see a big shift back up, largely driven by the rapid increase in interest rates.

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Obviously, with population growth, there’s been so much demand coming into the system that it’s allowed prices to keep pushing higher.

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Here’s the key thing:

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If you think about anyone who purchased property in 2019, and look back at 2019 or 2010, those people, even at the peak of those markets, would still be willing to cut off their left arm to buy an extra property.

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Not sure why you'd have to cut off your arm just to buy a property, but hey! I don't make the rules.

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Now, if we do see some sort of collapse in the economy, it doesn't necessarily mean Australian house prices will also be affected.

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The housing market is a lot slower relative to something like crypto or shares.

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With crypto, it's 24/7, so if it starts crashing tonight, people can sell tonight, sitting in their bedroom.

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If you're looking at the share market, it operates during certain hours, depending on which market you're working in.

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Whereas, housing takes at least 6 to 8 weeks to transact on anything.

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So, if you think about how long it would actually take for people to sell their houses, it takes a lot longer.

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Before people sell their houses, they will cut back on everything else in terms of lifestyle because having stocks or crypto is not a necessity in life, but you need shelter.

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So to me, I think it's business as usual, and in fact, I’m confident that we're going to see prices rise much higher, given where interest rates are right now.

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If we were talking about interest rates not having gone up and we were experiencing these problems with high inflation, declining retail spending, and non-existent GDP growth, there would be no further moves to make.

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Right now, if they decrease interest rates by about 100 basis points, we’ll start seeing the economy flourish, which should then flow into businesses as more people have disposable income.

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I hope you’ve learned a lot from this article.

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I know it's a bit lengthy, but I hope you’ve enjoyed the content.

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Share this with someone who might be worried right now, but who really should be preparing for the best period to grow their wealth. These are the opportunities in the market when people are scared.

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Hope you’ve enjoyed this one.

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Catch you in the next one.

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Thanks, guys!

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