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Wesfarmers Ltd’s chairman warns Sydney & Melbourne house prices could fall another 20%

The August reporting season may have left many feeling pleased with their share portfolio but this isn’t the time to get complacent as a key business leader warned that Australia could be facing a recession.

The warning from the chairperson of conglomerate Wesfarmers Ltd (ASX: WES), Michael Chaney, comes at a time when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is pulling back from its more than 10-year high.

The top 200 stock benchmark is wallowing 0.7% in the red this morning with Sims Metal Management Ltd (ASX: SGM), Western Areas Ltd (ASX: WSA) and Transurban Group (ASX: TCL) leading the falls.

Falling house prices will be the thing that could break our golden run with Chaney commenting to the Australian Financial Review that it wasn’t unrealistic for Sydney and Melbourne home prices to tumble as much as 20% in this downturn.

A hard landing in the property market will tip Australia into a recession, he added, and that will end our record-breaking economic run. Australia has not had a recession in over 26 years and is the only country in the world that can claim to have pulled off such a feat.

But this is perhaps why the statistical probability of us having one is high and we have a generation of Australians who don’t know what a recession looks like.

What is perhaps more controversial is Chaney’s belief that a Labor federal government will greatly increase the chance of a residential market hard-landing, and by extension the risk of a recession, as Labor leader Bill Shorten is committing to removing negative gearing.

I am not sure I buy that argument but one would think that holding a key position in a conglomerate would give Chaney a better view than most of any looming recessions, and he highlights Wesfarmers’ experience in Perth as an example with property prices in the western state falling for three years – thanks to the end of the mining boom.

Wesfarmers has experienced a significant decline in retails sales in that state as a result, although Chaney didn’t provide any further details. Wesfarmers operates national department stores like Kmart and the Coles supermarket chain.

It’s perhaps no coincidence that discount variety chain Reject Shop Ltd (ASX: TRS) blamed weak sales in Western Australia for its disappointing profit result last month.

This risk to the retail sector isn’t priced into the market as shares in our leading retailers such as JB Hi-Fi Limited (ASX: JBH) and Woolworths Group Ltd (ASX: WOW) are judged on company or category specific factors.

Perth may be an important lesson for investors because while national house prices have been falling for only 11 months, many property experts believe the downturn will last another year or two.

Even if the property market doesn’t trigger a national recession, the protracted weakness in housing may very well be enough to start a retail recession.

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Motley Fool contributor Brendon Lau owns shares of The Reject Shop Limited. The Motley Fool Australia owns shares of and has recommended Transurban Group and Wesfarmers Limited. The Motley Fool Australia has recommended The Reject Shop Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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