Without the benefit of reading today’s balance-of-payments figures from the ABS, I’m expecting tomorrow’s GDP figure for the March quarter to be worse than the median forecast of mainstream economists. Probably much worse.

As Bloomberg reports this morning, the median forecast is for a contraction. In the March quarter, exports took a hit as floods disrupted the production and transport of exportable commodities. The implications for the balance of payments, hence GDP, have already been estimated.

The mainstream pundits should have got that much right. But if they are true to form, they will have neglected or underrated three implications of the housing bubble, the existence of which they continue to deny even as it bursts before their eyes.

First, negatively geared investors, by definition, need capital gains to justify their interest costs. Actuary Anthony Street has calculated that a housing investor with a loan/valuation ratio of 80% would need capital gains of nearly 6% per annum to get a better return than one would get from a term deposit. But Australia’s 1.7 million property investors, of whom about 1.2 million are negatively geared, have been making capital losses since May last year — the peak of the market, according to RP Data’s Home Value Index. Some localities, of course, will have done better than the index; but others will have done worse.

Second, owner-occupants who over-extended themselves to buy at or near the top of the market (with or without the aid of the first home owners’ booby trap) needed prices to keep rising so that if something went wrong, they could sell up and pay off their debts. Now many of them can’t.

Third, when property owners see that the rise in their net worth has stopped, they reconsider their spending plans even if they are not negatively geared or over-extended. If they are, the effect on their spending is more severe. And when they reduce their spending, they reduce the income of other parties, who in turn are forced to reduce their spending, and so on.

It doesn’t take a fall in GDP or a rise in unemployment to prick a housing bubble. The onset of economic contraction usually comes after the bursting of the bubble. When the housing market is in a bubble, it lives a life of its own, dies a death of its own, and leaves a legacy of debt that weighs down the rest of the economy.

The March quarter of 2011 was the third consecutive quarter of falling or stagnating home prices. The effect on spending was already showing in lacklustre retail figures; in trend terms, the volume of retail trade was stationary in the December quarter and fell in the March quarter.

Such belt-tightening can cause a contraction in GDP even before mortgage delinquencies and repossessions reach levels that mainstream commentators regard as worrying. They don’t get worried until the recession is confirmed. Then they start rewriting history to pretend that the recession caused the housing crash instead of vice versa.

*Dr Gavin R. Putland is from Prosper Australia, a land values research group.