House prices in Australia’s biggest property market are plummeting at a rate on track to deliver the largest annual decline in 40 years, crunching household spending and GDP growth, amid forecasts that hotly anticipated investment in data centres will act as a drag on the economy in two years.
Within weeks, Jim Chalmers and Anthony Albanese will face the prospect of a fourth 0.25-percentage-point interest rate increase this year to fight inflation, piling pressure on a housing market further dampened by the May budget tax changes, and leading some economists to warn of stagflation or a recession in Australia.
In the first full quarter of data since the May budget, property analytics firm Cotality recorded a 4.7 per cent drop in dwelling prices in Sydney, which if continued would amount to an 18.4 per cent annual crash.
The capital city, leading the national downturn, has slid more than 7 per cent since the peak and outpaced the earlier 2022-23 correction.
“I would argue that we are headed for the largest correction in Sydney for at least the last 40 years and that view is not breaking from the pack,” said Cotality’s head of research Tim Lawless.
“Annualising the quarterly rate we get around (an) 18.6 per cent fall and that would be the highest, beating the previous peak to trough fall of 13 per cent in 2017-19 which was during a credit crunch.”
Mr Lawless said the downturn was “entrenched” and another rate rise would only make that fall more likely.
“There is a multiplier effect from this too which is that people feel less wealthy and they stop spending,” he said.
National home prices dropped by 0.9 per cent in August, with four capital cities recording a monthly fall of 1 per cent or more, according to the Cotality data.
Similar property price analysis by PropTrack shows capital city declines nationwide of 0.3 per cent through August. Affordability challenges have accelerated falls in Adelaide, of 0.9 per cent. Sydney and Brisbane had a 0.3 per cent slip, while Melbourne, Perth and Canberra moved 0.2 per cent lower.
A Newspoll on the weekend revealed that 62 per cent of voters support house prices staying the same or increasing compared with 32 per cent who support property values decreasing.
Softer spending figures are set to dampen the June quarter economic growth figures due out on Wednesday.
Goldman Sachs chief economist Andrew Boak is forecasting zero growth in the quarter, and HSBC’s Paul Bloxham is forecasting 0.1 per cent growth, with the prospect of either stagflation or recession down the track.
“There is a clear risk that we end up with the largest correction in recent history,” Mr Bloxham said of home prices, “and given the pace of decline is so significant, that usually needs a circuit break in the form of a rate cut. But there is no rate cut any time soon.”
He said that, if Wednesday’s GDP data showed stronger than expected growth, the RBA might be forced to lift its cash rate further, “increasing the risk of pushing the economy into a recession – a particular risk given the rapidly deflating housing market”.
Goldman Sachs said the boom in data centres was unlikely to come to the rescue of softening GDP.
It said data centre construction would have a peak impact of adding 30 basis points to annual GDP growth in 2027 before turning into a modest drag as the build-out slows from 2028.
Resource constraints and community opposition pose downside risks to the size and timing of construction. They estimate about $130bn of cumulative data centre and related infrastructure investment through to 2029-30 – accounting for about 1 per cent of GDP over this period, a fraction of the 7 per cent mining investment contributed during the mining boom.
On Monday, a research paper conducted by Treasury and sent to Dr Chalmers, revealed that the economic benefit from the boom in data centres would be difficult to measure.
“Unlike previous investment booms, where the surge in investment was followed by a sustained increase in commodity exports, economic activity generated by AI related investments may present challenges for economic measurement,” it said.
The consensus of economists is for 0.3 per cent GDP growth in the June quarter, leaving the annual pace well below trend at 1.9 per cent. A lower GDP reading with the same level of hours worked would also indicate another negative productivity reading.
Australia had 162 operational data centres as of March this year, according to Data Centres Australia. Another 130 data centres are proposed.
“The investment in data centres will not contribute equally to domestic economic activity,” Treasury said. “While construction generates significant demand for local engineering, building and installation services, a large share of machinery and equipment spending is directed towards imported equipment, including servers, storage systems, networking equipment and other ICT hardware. The import intensity of data centre investment is estimated at around two-thirds.”
Read related topics:Data CentresHouse Prices