SYDNEY -- Australia's housing prices staged the largest monthly drop in 35 years during December as a slowdown in Chinese investment helped push a cooling market into a deep freeze.
The market contraction could undermine Australia's economy, which has been on an upswing for 27 consecutive years.
Housing prices in eight major Australian cities fell 1.3% in December from the previous month, according to property data provider CoreLogic. This drop represents the biggest month-on-month retreat since 1983, says Morgan Stanley.
The sharp decline stems partly from China, Australia's biggest trading partner. Beijing imposed capital restrictions that tightened the spigot on funds flowing into Australia. Chilled investor sentiment also plays a part as China's economy decelerates amid its trade friction with the U.S.
Home values in Sydney alone sank 1.8% during December. The city's housing prices soared by 76% over five years through mid-2017, benefiting from historically low interest rates and the influx of Chinese investment money.
Around that time, Australian financial authorities ordered lenders to toughen standards for granting home loans. Canberra also strengthened regulations involving foreign investment in the real estate market, changes that deterred Chinese buyers.
The authorities aimed to achieve a soft landing for property values, but the move cooled the country's housing market more than expected. Prices in Sydney fell by roughly 10% over a year. The number of housing approvals in Australia dropped 9.1% in November from October, touching a level last seen in August 2013.
Morgan Stanley says Australia faces mounting risk of an economic slowdown stemming from a correction in housing prices. The country's gross domestic product grew 0.3% from the prior quarter during the July-September period, undershooting market projections of 0.6% growth.
The Reserve Bank of Australia, the country's central bank, forecasts 3.5% GDP growth for this year, but British research firm Capital Economics predicts an increase of as little as 2%.
Australia's 1.5% policy rate, among the lowest in the country's history, also represents a risk given the country's rising household debt. The ratio of household debt to income jumped to around 190% last year from 160% in 2013, a conspicuous increase among major developed countries. If the Reserve Bank decides to raise rates, the household debt load could intensify.
Consumers appear to be tightening their purse strings. Household spending for July-September grew only 0.3% from the previous quarter, down from the 0.9% rise during the April-July period.