If we are hoping for a 50% fall in Australian house prices, do we realise the implications? Ireland and Finland show how collapsing house prices can devastate an economy, triggering banking crises, rising unemployment and harsh recessions.
Ireland: During 2007-2010, the property and construction collapse exposed banking weakness that led to major government support and EU–IMF assistance.
Key variables: house prices -50%, GDP -10%, unemployment up to 15%.
Finland: The Finnish example of the early 1990s involved a housing-market collapse, a banking crisis and a deep recession.
Key variables: house prices around -40%, GDP -10%, unemployment up to 20%.
United States: The GFC housing crash contributed directly to mortgage losses, financial-market stress, a deep recession and rising unemployment.
Key variables: house prices around -30%, GDP -4%, unemployment up to 10%.
Australia: The GFC did not produce the same housing/banking crisis. Australia felt economic pain, but avoided the similar outcomes seen in the US and Ireland.
In Ireland, Finland and the United States, housing weakness appeared before the major banking and economic impacts.
During the GFC, Australia largely imported the shock from overseas. The housing market was not the origin of the crisis.
However, Australia's current housing price situation, driven largely by higher interest rates and policy changes, could be a problem because major housing downturns elsewhere have sometimes led to major economic distress.