Early data received by the Melbourne-based Land Values Research Group for the second half of 2008 indicate that the ratio of property sales to GDP in Australia has fallen almost 30% from its peak in 2007-8. This is the largest fall since the 31.4% plunge that preceded the recession of 1990-1. Since 1972, recession has followed whenever this ratio has fallen more than 17.5% year-on-year.
The PCA/IPD indices of Australian commercial property, together with the various indices of home prices cited by the RBA in its latest
Statement on Monetary Policy, show that the fall in sales is accompanied by falling prices, confirming that Australia’s long-running property bubble has burst. Stephen Mayne’s article further supports that diagnosis.
Australia is therefore on the threshold of a domestic credit crunch caused by falling collateral values — the same mechanism that precipitated the “subprime” recession in the USA and similar recessions NZ, the UK, Ireland and continental Europe. We are entering recession not because of the rest of the world, but in imitation of the rest of the world, because we did what they did: we pumped up a property bubble.
By itself, the decline in the ratio of property sales to GDP indicates a recession starting no later than 2009-10, and possibly before the end of 2008-9. The speed of that decline, combined with auction data showing that it continued into calendar year 2009, suggest an earlier onset of recession. Combining this with more commonplace considerations (terms of trade, employment, retail sales, and capital expenditure), I have offered the following tip concerning the upcoming National Accounts release:
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On balance, then, let us say that the chances of a recession beginning in the December quarter of 2008 are somewhat less than 50%, that the chances of a recession beginning in the March quarter of 2009 are somewhat more than 50%, and that the chances of avoiding recession through 2009 are somewhere between zero and Buckley’s. In short, the question to be answered by Wednesday’s release of the December-quarter GDP result is “When DID the recession start?”
Those who claim that the recession will be fully imported may well agree with me on the timing. But they have no idea how bad it’s going to be.