Eliza Owen* says despite key vulnerabilities in the Australian economy, there are reasons to be optimistic about the property market.
There are some reasons to be optimistic about Australian property in 2020, but there are also key vulnerabilities in the economy as a whole, as well as variations across Australian dwelling markets to be considered.
Historic negative economic shocks have seen dwelling values relatively insulated.
However, transaction activity has been more impacted.
The same phenomenon is currently playing out, as the combined capital cities markets have only just begun showing mild value falls of less than 0.5 per cent in the past month, while CoreLogic estimates suggest the number of sold properties declined around 40 per cent over April.
The economic outlook for the Australian economy prior to COVID-19 was modestly positive.
Growth in housing market values was expected to extend over 2020, though it was anticipated that growth momentum would slow in the wake of affordability constraints, and higher levels of listings.
The operating environment for the housing market has now completely changed.
On aggregate, the Australian housing market is on the cusp of another downturn.
New housing demand is likely to see a continued decline, as borders remain closed to overseas migration, and unemployment rises.
The economic fallout from COVID-19
An Australian Bureau of Statistics (ABS) survey of workforce conditions noted that between 14 March and 18 April, 7.5 per cent of payroll jobs had been lost.
More recently, the ABS unemployment figures released in May showed that almost 600,000 Australians had lost their jobs in April, as the unemployment rate increased from 5.2 per cent to 6.2 per cent.
What is happening to residential real estate amid COVID-19?
On 17 March, CoreLogic circulated an article exploring property value performance against such events.
The findings were:
- Negative economic shocks do not necessarily lead to severe declines in property prices.
- Property does not see the same declines as shares during a downturn, because it is used to live in and therefore not as speculated upon as shares; additionally, it cannot be bought and sold as quickly as shares, meaning price movements are not as volatile.
- Due to the temporal nature of the COVID-19 downturn, vendors may hold high expectations for their property value and simply hold off selling until the economy returns to full-scale production.
- The current high level of household debt amplifies the risk of an adverse change in household circumstances such as loss of income, unemployment or illness on housing market conditions.
- The number of property transactions have seen more drastic declines in response to economic shocks, and could be even more affected amid the COVID-19 downturn.
Housing values have shown marginal declines
To date, housing values have only shown a mild slowdown.
By early May, capital city housing values fell by less than 0.5 per cent over a month, led by Melbourne.
CoreLogic models suggest that across Australia, residential property sales declined about 40 per cent over April.
The magnitude of decline was fairly uniform across different parts of the country and was driven by a decline in consumer confidence.
CoreLogic listing data shows the amount of stock available for sale is about 25 per cent lower than it was around this time last year.
The low level of listings signals a tough period for those developing and selling residential real estate.
But it also signals a lack of distressed sales flooding the market.
In other words, not many people are selling, because not many people have to sell.
It is likely that a reprieve on mortgage repayments has protected people from distressed sales.
Another pain-point in the real estate market is rents.
CoreLogic recorded a –0.4 per cent decline in rent prices nationally across Australia over April.
Rental markets have been particularly dampened by falls in employment.
Housing finance
Prior to the onset of COVID-19, housing finance conditions were becoming more accommodative of potential buyers.
This was enabled through:
- The repeal of temporary macro-prudential measures.
- The halving of the cash rate between June and October 2019.
- Declines in the typical mortgage serviceability assessment rate.
Monetary policy and financial regulation have sharply shifted in response to COVID-19.
Policies now focus on deferring the implementation of a more conservative lending environment, ensuring high levels of liquidity among lenders, and ensuring low-cost debt to encourage spending.
The Reserve Bank of Australia (RBA) has adopted a record-low cash rate of 0.25 per cent, which has previously been referenced at the “effective lower bound”.
This means that further reductions in the rate would not see any added benefit to the economy.
Reductions in the cash rate typically have an inflationary effect on house prices, with a 1 per cent reduction in the cash rate increasing property prices by about 8 per cent over two years.
However, due to extraordinarily low levels of consumer confidence, it is less likely that the record low cash rate will lead to further price increases in the short term.
According to the Australian Prudential Regulation Authority (APRA), banks were already in a strong capital position before the onset of COVID-19.
APRA acknowledged that in the current environment, it would be acceptable for capital ratios to sink below the additional, high capital requirements set in 2017, provided banks can still meet minimum capital requirements.
This will give banks more room to lend in the coming months.
Other accommodations made by APRA include:
- New reporting methods for loans where repayment pauses have been offered for six months.
- Postponed implementation of supervisory and policy initiatives to 2021.
- Postponed implementation of Basel III reforms until 2023.
- Suspended issuing of new banking licences for six months.
If reductions in income mean this debt cannot be serviced, there may be increased incidences of distressed sales, which would bring broader housing market values down further.
It is worth noting that no such signs of distress are yet visible in the housing market.
This is supported by a very low level of for sale listings.
* Eliza Owen is Head of Research Australia at CoreLogic. She tweets at @eliza_owen.
This article first appeared at www.corelogic.com.au.
