Australian property prices are predicted for falls this year, but there are two reasons why they could crash harder than expected.
Credit ratings agency Moody's has pencilled in a prediction that house prices will fall by 9.3% in Sydney and 11.4% in Melbourne, according to the AFR.
However, Moody's has identified two key risks to Australian house prices that could cause prices to crash further than expected during 2019.
The big four banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) could (or may be forced to) enact even tighter lending restrictions in light of the royal commission and the new impetus given to APRA & ASIC.
We've seen already what has happened to the housing market due to lending restrictions over the past year.
The other main risk is that Labor's negative gearing policy could hurt sentiment about property, with investors likely to be put off. One of the only reasons why investors are willing to accept an annual rental cash loss was due to the mitigation effect of negative gearing.
The negative wealth effect of harsher house price falls could lead to a hit to household spending and a rise of the unemployment rate, which would be bad for the 'real' economy.
It has been unhelpful that Sydney and Melbourne house prices were so high, it would be better for the economy if people spent less on housing and more on other products & services. But the fall out of house prices dropping could be worse than simply property values reducing by 10%.
Foolish takeaway
An Australian recession is definitely not set in stone, the worst-case scenario doesn't usually happen. But Australian households remain heavily indebted and loan-to-value ratios are increasing as property prices fall. I wouldn't want to invest in many cyclical shares at the moment.
