Where to next for Aussie housing?

Bella Kidman

Livewire Markets

COVID-19 has wiped out the progress of the Australian residential housing market. With unemployment still surging, borders shut and immigration down, the market has been hit by an unexpected decline. Yet, the extension of government stimulus, along with low mortgage rates has allowed the market to keep afloat. However, when this stimulus eventually is retracted, will the housing market crash and burn? 

In the final instalment of this three part collection, our experts analyse the outlook for the next 12 to 18 months for Australian housing. They provide the best and worse case scenario, how much decline the housing market will experience, and the opportunities to capitalise on this. 

Responses come from: 

Capital cities to be hit hard 

Shane Oliver, AMP Capital 

Further falls in average capital city home prices are likely. High and still rising unemployment, the collapse in immigration and the depressed rental market will likely combine to drive weak housing demand and increased forced sales. This may not become fully apparent though until JobKeeper, increased JobSeeker, bank payment holidays start to wind down from later this year. Sydney and Melbourne are the most vulnerable given their higher dependence on immigration, higher debt to income ratios, higher house price to income ratios and greater investor penetration.

The resurgence of coronavirus cases and the renewed negative impact of this on the economic recovery via Melbourne’s stage 4 lockdown, the reversal of some reopening measures in the rest of Australia and reduced confidence have added to the downside.

Our base case is for a 10 to 15% top to bottom fall in capital city house prices from their April high (of which they have already done around 2%). However, this masks a wide divergence between cities with Melbourne likely to see a 15-20% decline (of which its already fallen 3.5%) partly reflecting the bigger hit to its economy from its ongoing lockdown, Sydney prices likely to see a 10-15% decline (of which its already fallen 2.1%) whereas Adelaide, Brisbane & Hobart are only likely to see falls around 5% and Canberra prices are likely to be flat to up. Perth looks a bit more fragile despite having seen a 22.3% decline from its 2014 high and so prices there are likely to fall 5-10%.

This scenario would see house price falls act as a small drag on consumer spending via wealth effects but it should be manageable with ongoing low interest rates and government stimulus and so would not be enough to derail the recovery in the economy.

A worst case would see prices fell 25% or so. This could be triggered if yet another resurgence in coronavirus cases morphs into a renewed economy wide lockdown resulting in even more permanent business failures and job losses ultimately resulting in a sharp rise in forced property sales. This could risk a debt deflation spiral as collapsing home prices depress consumer spending which in turn pushes unemployment up even higher resulting in more forced sales and price falls. Fortunately its not our base case and we attach a low probability to its occurrence as the Government and RBA would likely do all they could to head it off.

A best case scenario would see a quick return of jobs over the next six months such that a wind down in JobKeeper and JobSeeker and an end to the bank payment holiday causes little problem and immigration levels are quickly returned to pre coronavirus levels of around 240,000 people per annum. This along with record low interest rates could see house prices start to rebound from later this year.

Our base case would favour property in suburbs and regional areas over inner city areas and houses over unit.

The worst case scenario would hit all property types but inner city apartments the hardest.

The best case scenario would basically mean a quick return to normal for the Australian property market and so current weakness should be seen as providing a great opportunity for investors as it would be “off to the races” yet again. It would not be so good for first home buyers.

Riding the work from home wave 

Doron Peleg, RiskWise Property Research

What this all means is now is the time to buy if you are a first home buyer or an owner-occupier with a secure job, as this current slowdown in the property market is only temporary, with houses in popular areas likely to experience solid capital growth in the medium to long term.

Once the COVID-19 issue is resolved, most likely in 2021, the traditional connection between low interest rates and increase in dwelling prices is likely to take place.

Obviously, some property markets are less volatile, and these are being taken advantage of by mobile professionals who work remotely in stable corporate environments. These are the ones looking for the best of all worlds – lifestyle, accessibility to employment hubs and affordable housing - and COVID-19 has provided them with just that. These include areas of southeast Queensland such as the Sunshine Coast and the Gold Coast, just over the NSW border in Byron Bay and further south on the Central Coast, in areas such as North Avoca, Terrigal and Wamberal. Then there’s also sought-after locations such as the Hunter Valley, Wollongong and the South Coast, and in Victoria, the Mornington Peninsula, Geelong and Ballarat. Beachside suburbs are especially outperforming the market as they offer such fantastic lifestyle opportunities.

While many organisations were using remote working to improve productivity and the attractiveness of workplaces to entice the best talent, reduce office costs and reduce international and intrastate travel prior to the onset of COVID-19, it has now become an accelerated phenomenon with offices across large cities trying to minimise face-to-face meetings that required commuting.

While there was definitely uncertainty during the first wave of the pandemic, the second wave shows us quite clearly these new work practices are here to say most likely until end of 2020 and well into 2021.

Therefore, the demand for regional areas offering great lifestyle choices is likely to further increase among those with stable incomes.

A modest decline on the horizon

Pete Wargent, Buyers Buyers

A realistic base case scenario for the next year might incorporate some modest 0 to 5 per cent declines for housing prices over the remainder of 2020, but with more elevated risks of 5 to 10 per cent declines for inner city units, with possible forced sales materialising as the end of mortgage holidays draws closer (note: our free WeIntelligence tools and reports provide far greater detail at the sub-regional level).

Where states and territories experience prolonged shutdowns relating to COVID-19 then the downside cases could become more pronounced.

Should Australia successfully contain the spread of COVID-19 then it is possible that the long-held correlation between the price of money and housing price growth could reassert itself in 2021, but the range of possible outcomes is unusually wide.

Borrowing capacity has increased for some borrowers, but on the other hand high rates of underemployment and underutilisation are likely to persist for several years.

A significant decline in construction, tourism, and higher education activity will all weigh heavily on the rebound in employment, suggesting that the recovery will take years to play out with interest rates likely to be glued to the lower bound for several years to come.

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Don't forget to read the previous two chapters - Buying property during a recession? Not as crazy as it sounds and The key to recovery behind this housing crisisClick follow below to be notified when I publish content in future.

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Bella Kidman
Content Editor
Livewire Markets

Bella is a Content Editor at Livewire Markets.

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