In ordinary times, they're inseparable. But not now.
A spectacular bounce on the stock market since March, courtesy of the trillions of dollars being showered over the developed world by central banks and governments in their efforts to stave off the worst of the recession, hasn't been replicated in property. At least not here.
While the dire predictions of a dramatic plunge in housing values so far has failed to materialise, even relatively conservative forecasters maintain that we have yet to see the impact of the recession on housing.
The Morrison Government effectively put the handbrake on a potentially savage housing market wipe-out with its income support programs and by cajoling the banks to give relief to landlords and mortgage holders on repayments.
But it cannot hold back the tide forever. If unemployment levels remain elevated for longer than anticipated, or even along the same pattern as the last recession, large numbers of property investors could be forced to start selling. Owner occupiers will come next.
That's because banks have a legal obligation to recognise and report bad and doubtful debts in their accounts. It's worth noting, too, that those who have asked for debt relief aren't getting a free ride.
They're racking up interest debts that are being capitalised into their loans. When the holiday ends, they'll owe more than they did to start.
A large portion of withdrawn super went into mortgage offset accounts to cushion the blow from any housing downturn.(ABC News: Liz Pickering)
More than 800,000 Australians took up the offer to defer loan repayments — on housing, business and personal loans — when the job layoffs began in earnest in March and, faced with a crisis when the deferral schemes were due to end next month, those schemes have been extended.
On top of that, as of a fortnight ago, almost $28 billion had been withdrawn from superannuation accounts, with a large portion flowing into mortgage offset accounts which could cushion the blow from any housing downturn.
Both developments, however, point to a fair extent of household anxiety over the ability to repay. And the ANZ already has warned that some homeowners may not make it,warning some would have to consider selling "in the next few months."
Why the Government is desperate to avoid a downturn
Nowhere is real estate more fundamental to the health of an economy than here.
Stock market crashes can really hurt. They reduce wealth and hurt spending. But in a property-obsessed nation like ours, a serious downturn in property prices could be significantly worse, particularly since a large portion of our economy is geared towards residential construction.
The Morrison Government has been keen for banks to extend loan relief, in the hope that it could tide the jobless over.(ABC News: Nick Haggarty)
Soaring values since the early 1990s have seen our banks transform themselves into glorified building societies. The more housing boomed, they more they lent. The more they lent, the faster prices rose.
It was a perpetual motion money machine.
It's culminated in record levels of household debt of nearly 200 per cent of income and a banking sector that is hugely exposed to real estate. Around 80 per cent of mortgagees have a loan with one of our big four banks.
That's why the Government has been so keen to have the banks extend loan relief, in the hope that it could tide the jobless over until a recovery was well underway.
Most recessions are sparked by some kind of financial crisis: a credit shortage, a sharp hike in interest rates or the bursting of a financial bubble, such as overpriced housing.
This one was sparked by a health crisis that has led to mass unemployment. But it could easily loop back around and create a financial crisis, making the entire problem so much worse.
Housing demand in the dumps
Only a few months back, normally sober commentators were predicting a housing market crash of up to 30 per cent.
Even the Commonwealth Bank, Australia's biggest home loan provider,pencilled in a downturn of 32 per cent.
While the only fundamental changes since then have been a deterioration in the US economy,where the pandemic now is out of control and jobless figures are back on the rise, and the worrying outbreak in Victoria, an air of optimism has settled over our economic prospects.
Still, late last week, ratings agency S&P predicted a 10 per cent drop in our housing prices nationally as the virus numbers gathered pace in Victoria.
"We think Sydney and Melbourne are two markets that are likely to drop by more than 10 per cent, but Melbourne is weaker as population growth tumbles," it said.
That's a heroic understatement, for it highlights the second big hit to housing demand. The first, obviously, is rising unemployment. And the second is the drop in population growth.
Immigration accounts for about 64 per cent of our population growth. And population growth fuels demand for housing. All those extra people have to live somewhere. Which is why housing construction is so important to the economy.
With our borders closed, however, annual immigration is set to plummet from 232,000 two years ago to just 31,000 this financial year. That's the lowest population growth in a century. And those incredibly weak numbers are based upon a reopening of our international borders in January, which now seems highly unlikely.
But wait, there's a third weight on demand. Housing credit numbers released last week saw loan growth collapse to just 3.1 per cent, the lowest in around half a century.
Not only that, investors have completely abandoned the housing market which, given the minimal chance of capital gain coupled with declining rents, isn't surprising.
The problem with supply
If only you could turn off the tap. Unfortunately, construction is a medium-to-long term business and once you're underway, there's no turning back.
What happens is that there are delayed reactions — what economists call "lags". Right now, there's quite a bit of construction underway from projects commissioned before the pandemic hit which will hit the market just as demand wanes.
That's going to weigh on prices. And that then leads on to other problems.
According to the latest numbers released last week, building approvals in June dropped almost 5 per cent, pushing the annual decline to almost 16 per cent. Both apartments and houses were down.
It's a normal reaction to a weak market but the extent is extraordinary. The construction downturn will reduce supply, which eventually will support housing prices, but in the meantime, it could be tough going for those in construction.
The shortage of work is likely to see firms go to the wall and a big drop in demand for labour. While that may be partly offset by the recent construction stimulus, it won't be enough to pull the industry through.
That will lead to even more unemployment. And that leads to further pain for housing as builders struggle to make ends meet.
It all goes to highlight the yawning gap between the real world and a stock market that has become increasingly divorced from reality.
