If the current weakness in dwelling prices turns into a sustained downturn, residential property owners could seek values falls by as much as six or seven per cent over the year ahead.
According to property research group CoreLogic, capital city dwelling values fell by 1.1 per cent in May after rising by just 0.1 per cent in April.
A number of commentators have pointed to weak economic growth, low wage growth, high household debt levels and an oversupply of apartments in some markets as factors that might contribute to a residential property downturn.
CoreLogic senior research analyst Cameron Kusher has reviewed the downturn in 2008 and 2010 to 2012 to get a sense of what might play out in a sustained downturn.
Capital city dwelling values fell by 6.1 per cent between March and December 2008 and by 7.4 per cent between October 2010 and May 2012.
The 2008 decline was relatively minor, considering that most advanced economies went into recession as a result of the financial crisis. Housing markets in a number of markets fell heavily.
Against the overall decline of 6.1 per cent, Melbourne dwelling values went down by 8.3 per cent, Perth values 6.8 per cent and Sydney values 6.2 per cent.
The period of decline proved quite short, with government stimulus measures staving off bigger declines.
During the decline from late 2010 to May 2012, Darwin dwelling values fell by 19.7 per cent, Hobart values fell by 14.3 per cent, Brisbane values by 11.7 per cent and Melbourne by 10.5 per cent.
Falls in Sydney (down five per cent), Adelaide (down 6.9 per cent) and Canberra (down 4.4 per cent) were more moderate.
CoreLogic says the drivers of these earlier declines were external economic shocks and, in the fall from 2010 to 2012, the withdrawal of stimulus in the form of low interest rates and generous first home buyer grants.
“We aren’t currently seeing any economic shocks of the magnitude of the 2008 financial crisis but we are seeing the unemployment rate are similar levels to 2008/09 and historically high levels of underemployment,” Kusher says.
“The market is also seeing historically low mortgage rates moving higher against a backdrop of record low wages growth and record high household debt.
“Depending on how much mortgage rates are increased (noting that this is not happening due to the RBA) home owners should be aware that it could lead to a slowing or even some potential falls in dwelling prices.”