We now have a bet, and I expect to record an easy win within two years. That’s because falls in Australia-wide home prices will be limited by our lack of overbuilding, our much more disciplined mortgage market, and – especially – by the RBA’s ability to drive mortgage rates lower (something the Fed until this week had been unable to do; see latter part of chartset, attached).

Critically, the RBA knows that it was 15-20%-plus drops in home prices that poisoned the US and UK banking systems and economies. And so that must not happen here; accordingly, limiting the drop in average home prices is an unstated but obvious objective of increasingly easy RBA policy.

There’s more on this thread on Joshua Gans’ blog about the issue, and it’s interesting to consider the differences and similarities with those two countries. The United Kingdom has, apparently, not seen a huge wave of mortgage defaults, nor huge levels of overbuilding like the USA, but the prices have still cratered. However, Christopher Joye (the boss of Rismark) also points out on that thread some key differences between us and the other two countries:

I agree that the single biggest risk to Australia’s housing market is credit rationing, which is what has hurt the US and UK markets. there is a story in the UK of a FTSE 100 CEO only be able to get access to a 40% LVR loan when buying a home. amongst many other major differences between the US/UK and Aussie markets (including our tiny default rates, the absence of a sub-prime market, and no real credit rationing in the home loan market) is the fact that while in the UK/US most home loans are fixed rate, and therefore do not change in the near-term when central banks cut rates, in Australia aronud 85% of loans are variable rate. This means that are mortgagors immediately benefit when the central bank cuts rates.

Essentially, it’s very difficult to get a loan in the US and UK at the moment, at any price, for anything more than a small fraction of a property’s value. Australian banks are still ready, willing, and able to lend most of the money required to buy a house, even if the non-bank lenders have been finding it difficult.

You may be wondering why it’s so important to keep property prices from falling substantially – wouldn’t cuts in house prices solve the housing affordability issue and tilt the playing field back towards those who don’t presently have housing? Yes, quite possibly. But if property prices fall significantly, all those home owners will start cutting back hard on their spending. And that could make an Australian recession look more like what the UK and US are now experiencing.

What will actually happen is of course anyone’s guess…