Houses stand in Sydney, Australia, on Wednesday, Feb. 17, 2016. (Bloomberg)

Sydney house prices are tanking. In Australia’s most populous city, values have fallen 10.1 percent -- even further than declines in the late 1980s when the country was on the cusp of its last recession. They’ve had a good run: Sydney was the epicenter of a national property boom that saw the average price of a home in the city soar past A$1 million ($720,000). Now, as tighter lending standards kick in and nervous buyers sit on the sidelines, the consensus is that values still have much further to fall.

1. Are people getting worried?

Not just yet. For most Sydney homeowners, the downturn feels more like a pullback, with prices still 60 percent above where they were in 2012. With the earlier gains many of them enjoyed, few are underwater. The central bank isn’t panicking either: Reserve Bank of Australia no.2 official Guy Debelle pointed out in December that Sydney prices are still at the same level as September 2016 -- when the market was still running hot. The Melbourne market, which is also declining, is only back to levels seen in March 2017.

2. What’s the central bank’s view?

Watch this space. Debelle reckons the market’s in “uncharted territory” as he doesn’t know of an example similar to Australia’s -- where house prices are dropping as unemployment is falling, interest rates are at a record low and the economy is growing at a solid pace. But it would be a much different story if the economy suffered a shock. That might generate a vicious circle of house prices falling as people lose their jobs and fail to meet mortgage repayments, forcing them to sell. That would really exacerbate the downturn.

3. Are consumers tightening their belts?

There are potential signs. Hints so far include weak consumption in third-quarter GDP that economists attributed to the property drop. Yet the RBA isn’t so sure about the housing “wealth effect”. Unlike earlier booms, when Australians tapped their rising home values to buy cars and jet boats, this time they mainly used low rates to pay down their mortgages or build large financial buffers against their loans -- possibly a change in the national mindset following the global financial crisis. So because there wasn’t much splurging on the way up, Debelle says there may be less retrenchment on the way down. Watch the savings rate though -- when house prices fall, households tend to salt away more cash. Should that occur and wages remain stagnant, then something -- logically consumption -- will have to give.

4. How much further can prices fall?

That’s the A$64,000 question. Some economists predict another 10 percent for Sydney, taking the peak-to-trough drop to 20 percent. Typically in such circumstances, the RBA would cut interest rates to support the economy, making mortgages more affordable and luring buyers back to the market. But with rates already at a record low and wages stagnant, it looks like the only way to lure more buyers into the market is for prices to fall further. And there’s another worry for the market: Banks have become more nervous about lending, partly because of tighter standards and partly as a result of a government inquiry that’s revealed misconduct among lenders. Mindful of this, the RBA has urged banks to keep the credit taps open.

5. What does the RBA want to see?

Steady-as-she-goes. Ideally, the RBA would like an orderly house-price retreat that’s eventually stabilized by a tightening labor market and accompanying wages growth, giving households greater scope to borrow and spend. But the chances of such a neat transition seem remote, with the central bank itself expecting little wage growth over the next two years. Governor Philip Lowe is similarly concerned by the parlous state of Australians’ finances following their property binge: household debt is at a record 191 percent of income. That and tepid wages makes it tough to raise rates even if the economy warrants it -- indeed, it could be the RBA even ends up cutting.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Grant Clark

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