I cannot remember a time when there was more universal agreement amongst analysts that Aussie house prices are going to plummet. Unusually, the major banks are also jumping on the bandwagon. ANZ, CBA, NAB and Westpac all say house prices are sure to fall by at least 10%. AMP reckons the drawdown will be 20%. UBS is somewhere between 10% and 20%SQM thinks it could be potentially worse at 30%. Some nutters are even saying 50%

Our view since February has been clear, although I have stressed that we are in uncharted territory that makes it hard to formulate high-conviction predictions. My base-case is for Australian house prices to flat-line or fall by up to 5% over the next six months, and then quickly bounce to extend the boom that commenced in mid 2019. We expect total capital gains this cycle of between 20% and 30% driven primarily by the reduction of mortgage rates to record-low levels. (If you want to watch or listen to a Youtube podcast I did this week on our macro outlook, COVID-19, housing and much more, click on this link.)

We called the boom in prices between 2013 and 2017, the 10% correction between 2017 and 2019, and the big bounce over the last year. In April 2019 when prices were still falling and no analysts I know of had a positive outlook, we forecast that the RBA's rate cuts would drive a sharp 10% increase in prices over the next 12 months. That's exactly what happened. 

On Friday CoreLogic released their latest house price index data for April, showing that contrary to all the doom-and-gloom, Aussie house prices actually appreciated 0.3% in April. In fact, prices increased in every city except for Melbourne (-0.3%) and Hobart (-0.1%). Over the 12 months to April, national prices in the combined capital cities have risen 9.7%. Importantly, we are also seeing the expected pro-cyclical reduction in sales volumes and listings that will help buttress the current air-pocket in activity driven by the government's lockdown and the inability to host inspections or hold public actions. 

My final four screen-shots are from Bloomberg's collection of CoreLogic's daily house price index data, which shows that notwithstanding the pessimistic views of analysts, Aussie house prices appreciated over February, March and April. They now appear to be flattening in what is a picture of stability.

At a time when the cash rate is near zero, equities have cratered as much as 30%, and superannuation savings are suffering losses, we think mums and dads will value the relative outperformance offered by residential housing and the comparatively high gross rental yields on offer, which are around 3.5% to 5.0% for attached dwellings in Sydney, Melbourne and Brisbane. 

There are certainly non-trivial risks to our outlook. These include the fact that 7% to 10% of all residential mortgage borrowers have elected to take six month repayment holidays via their generous banks, which could create stress when repayments start again. If the current increase in the unemployment rate does not normalise to a reasonable new steady-state above the old circa 5% rate (say between 6% and 7%) following our projected rapid national exit from containment in May, that could result in more forced selling. If there is no vaccine, which we expect to be forthcoming more quickly than consensus, that would be another very real negative. And then there are other tail-risks that worry us, like an outbreak of serious conflict between China and the US. 

For the time being, however, we are happy to bet against every other mainstream analyst on the performance of Aussie housing over the next 12 months, albeit that this cannot be a high conviction call given the unprecedented nature of the 1-in-100 year Great Virus Crisis.

John Boardman

You are betting,through your holding of RMBS, that the housing markets won't be falling by anymore than 5%. Your portfolio positioning may cause observation bias that ignores data that house prices will crater. Goodluck with you bet on RMBS.

Jeremy Rosen

I’m been looking to buy a house in Sydney’s eastern suburbs for the last few months (after selling late last year). Pretty clear pricing is already off 10-15% with a lot of houses not selling. Pricing is coming off (no doubt) even if it’s yet to be reflected in the stats. Volumes are low and people are trying to hold on but how long they will be able to hold on for is anyone’s guess. Agents will tell you the same. Maybe it’s just worse in this pocket as it rose sharply during boom times but I’m hearing similar reports in other areas as well.

Andrew Smith

House sales data is sub-optimal at the best of times i.e. seems more about real estate PR with a focus on indirect auction clearance rates and listing volumes, while private treaty market is ignored. One would suggest more value data by Xmas or earlier, will be more meaningful (based upon actual sales), after impacts of mortgage payment deferrals, investor stress and higher unemployment.

Peter Ralph

Huge increase in banks bad debts provisioning and it's far from over. Years to get back to the pre CV employment levels. April's stats are a lagging indicator. I agree with Jeremy Rosen, prices are already down more than 5% and more to come.

Richard Fortune

Chris, when you say 20-30% this cycle, is that from a trough of May 2019?

Carlos Cobelas

Tell him he's dreaming !

Michael Whelan

Chris - good article, a lot of factors at play. Defer your repayments and withdraw part of your super will help those mortgagors through to the 'other' side, hopefully not the 'dark' side of foreclosure and mortgagee auctions. For what it's worth, speaking with several real estate agents in Melbourne's eastern 'burbs, their comments are the market is not dissimilar to the months leading up to the May 2019 election (ironically where we are now). The main obvious difference is unemployment is north, people are confined to barracks, and businesses are shut.