The S&P/ASX 200 Index (ASX: XJO) is trading down 0.7% to 7,438 points at the time of writing.
ASX 200 shares are experiencing a resurgence in 2023, with the index up 7.2% in the year to date.
Meantime, Australian home values are falling at their fastest and steepest rate ever, amid the most aggressive interest rate hiking cycle on record.
So, are we going to have an Aussie house price crash, and will it take the ASX 200 with it?
What's happening with Aussie house prices?
In short, nothing good right now. At least, not for the 66% of us who own our own homes, either with a loan (35%) or outright (31%), according to 2021 census figures from the Australian Bureau of Statistics.
We're seeing the steepest and fastest fall in national home values on record, according to independent property research house, CoreLogic.
That record was set last month when the CoreLogic daily home value index (HVI) showed a decline of 8.4% between the market peak on 7 May 2022 and 7 January this year — and it's still falling.
To clarify, CoreLogic measures 'home values' by combining all types of properties together.
Not coincidentally, May was when the Reserve Bank (RBA) began raising interest rates for the first time since 2010. It has never raised rates this much in as short a time period ever.
A fall in national home values this large and this fast hasn't been seen in more than 40 years.
When looking back over market cycles since 1982, the previous peak-to-trough record was an 8.38% drop in national housing values over 20 months between October 2017 and June 2019.
The current 8.4% dip has occurred over just nine months.
Is the Australian housing market going to crash?
According to the Australian Financial Review (AFR), RBA modelling suggests the peak-to-trough fall could be 20%. In another AFR article, a survey of 31 economists found a median forecast fall of 15%.
According to news.com.au today, Jarden investment bank has downgraded its forecast for house prices following last week's hawkish commentary from the RBA.
After previously tipping a peak-to-trough fall of 15% to 20%, Jarden analysts now expect 20% to 25%.
All these forecasts represent significant declines but not a crash. So, let's move on from that scenario.
But the odds are home values will continue to fall, so will ASX 200 shares go with them?
How will falling home values impact ASX 200 shares?
The likeliest scenario is that falling home values will impact some individual ASX 200 shares, not the whole market itself.
Remember, the share market is forward-looking and nimble. It responds quickly to economic factors like rising interest rates. Conversely, the property market is slow-moving, and there's a lag effect with rates.
If we look at the last few property downturns, we see that both home values and ASX 200 values sometimes fell simultaneously but not because of each other. They fell because of a common negative in the broader economy.
As we said earlier, home values have fallen by 8.4% between 7 May 2022 and 7 January 2023. During that same time period, the ASX 200 fell by 1.3%. The cause of both markets' falls? A common economic negative — rising interest rates (and rising inflation had a big impact on the ASX 200 as well).
During the now second-worst property market downturn between October 2017 and June 2019, home values fell 8.38%. Meanwhile, the ASX 200 went up by about 12.5%. That property downturn was caused by lending restrictions on residential loans, so the ASX 200 was unaffected.
In the property market downturn of 2008 to 2009, home values peak-to-trough fell by 7.4%. Over those two years, ASX 200 shares went down by 25%. The culprit? Once again, a common economic negative — the global financial crisis.
Right now, we're seeing new confidence in the share market even though the RBA has signalled clearly that there will be more rate rises to come. But probably not too many more, given the RBA reckons inflation has peaked.
So, the share market is looking beyond that already. There's sun on the horizon. Meantime, home values are still sliding and will likely go further, so things still look gloomy there.
Which ASX 200 shares will be affected by falling home values?
Economically, the biggest impact of falling house prices is the 'wealth effect'. People feel wealthier when home values are rising, and they're more inclined to spend money in the economy. When they're falling, people feel poorer — especially those who bought recently — and they're less inclined to spend.
Plus, rising interest rates and inflation means the cost of living is going up as well. In such times, people tighten their belts, and ASX 200 consumer discretionary shares are among the first to feel the effect.
When rates are rising, fewer homes are sold as opportunistic sellers leave the market. Fewer home sales can impact several sectors of the economy, so some ASX 200 shares are likely to feel it more so than others.
Think building companies like Johns Lyng Group Ltd (ASX: JLG), whose share price is down 31% over the past 12 months. And building materials suppliers like James Hardie Industries plc (ASX: JHX), down 37%.
Then there are furniture retailers like Harvey Norman Holdings Limited (ASX: HVN), whose shares are down 19%, and appliances company Breville Group Ltd (ASX: BRG), down 26%. Shares in plumbing and bathroom fixtures company Reece Ltd (ASX: REH) have also fallen 18% over the past 12 months.
