The outlook for Australia's property market is much stronger than just a few weeks ago, but conditions are likely to remain subdued in most parts of Australia in the second half this year.
Prices and sales volumes appear most likely to rebound in Perth, Adelaide and Canberra, whereas in inner-city Melbourne, inner-city Sydney, Hobart and the Gold Coast, prices will probably fall due to a heavy reliance on international tourism and migration. The recent COVID-19 spike in Melbourne may also weigh on prices.
But even in these areas, price falls will likely be modest, and much smaller than predicted at the height of the COVID-19-related shutdowns.
There are two clear downside risks to the property market. A second wave of COVID-19 infections will slow the economic recovery and will weigh on the property market. The possible end of government financial assistance and mortgage deferrals in September is already weighing on the market. But the government would be foolish to withdraw support too rapidly so will likely continue to provide more targeted support, and banks have indicated they will try to avoid forcing people to sell.
There is also the possibility of a more rapid rebound. Buyers may seek to take advantage of record low interest rates if confidence improves due to a strong economic recovery and immigration could rebound in 2021 faster than expected due to Australia being an attractive destination for skilled migrants and international students.
The property market has stabilised over the past couple of months and the economic outlook has improved
Australia's property market has stabilised over the past couple of months. Most indicators point to a rebounding, but sluggish, market.
At the peak of COVID-19 fears in early April, predictions of price falls of 10 to 20 per cent were common and seemed reasonable, and property sales had plummeted due to buyer caution and restrictions on selling. But the economic downturn and the impact on the property market due to the pandemic is likely to be less severe than forecast in April.
Business and consumer confidence have rebounded, employment and job advertisements have started to recover and business output is rebounding. The OECD expects Australia's economy to perform better than most other countries in the year ahead (see graph below).
But even with the better than expected recovery, economic conditions will remain subdued, with the unemployment rate and underemployment likely to remain elevated until at least 2022.
Clearance rates, a timely indicator of property market conditions, have averaged 60 per cent in Sydney in recent weeks, and about 55 per cent in Melbourne (see graph below). Clearance rates in this range typically aligns with flat or modestly declining prices. Auction numbers are well below average in Melbourne but are returning to more normal levels in Sydney.
The outlook for Australia's property market is much stronger than just a few weeks ago, but conditions are likely to remain subdued in most parts of Australia in the second half this year.
Prices and sales volumes appear most likely to rebound in Perth, Adelaide and Canberra, whereas in inner-city Melbourne, inner-city Sydney, Hobart and the Gold Coast, prices will probably fall due to a heavy reliance on international tourism and migration. The recent COVID-19 spike in Melbourne may also weigh on prices.
But even in these areas, price falls will likely be modest, and much smaller than predicted at the height of the COVID-19-related shutdowns.
There are two clear downside risks to the property market. A second wave of COVID-19 infections will slow the economic recovery and will weigh on the property market. The possible end of government financial assistance and mortgage deferrals in September is already weighing on the market. But the government would be foolish to withdraw support too rapidly so will likely continue to provide more targeted support, and banks have indicated they will try to avoid forcing people to sell.
There is also the possibility of a more rapid rebound. Buyers may seek to take advantage of record low interest rates if confidence improves due to a strong economic recovery and immigration could rebound in 2021 faster than expected due to Australia being an attractive destination for skilled migrants and international students.
The property market has stabilised over the past couple of months and the economic outlook has improved
Australia's property market has stabilised over the past couple of months. Most indicators point to a rebounding, but sluggish, market.
At the peak of COVID-19 fears in early April, predictions of price falls of 10 to 20 per cent were common and seemed reasonable, and property sales had plummeted due to buyer caution and restrictions on selling. But the economic downturn and the impact on the property market due to the pandemic is likely to be less severe than forecast in April.
Business and consumer confidence have rebounded, employment and job advertisements have started to recover and business output is rebounding. The OECD expects Australia's economy to perform better than most other countries in the year ahead (see graph below).
But even with the better than expected recovery, economic conditions will remain subdued, with the unemployment rate and underemployment likely to remain elevated until at least 2022.
Clearance rates, a timely indicator of property market conditions, have averaged 60 per cent in Sydney in recent weeks, and about 55 per cent in Melbourne (see graph below). Clearance rates in this range typically aligns with flat or modestly declining prices. Auction numbers are well below average in Melbourne but are returning to more normal levels in Sydney.
Buyer confidence has rebounded rapidly over the past few months. There was a substantial rebound in people thinking it's a good time to buy in May and June, and also a small increase in people's house price expectations, according to the Westpac-Melbourne Institute consumer sentiment survey (see graph above).
Listing views on Domain have increased by about 30 to 40 per cent since the trough in late March and been on an upward trend over the past few weeks. More people are also attending open for inspections.
Rental markets are also stabilising. The vacancy rate fell in all cities except for Melbourne in May, following a big rise in April. The proportion of rental listings being discounted to attract a tenant fell in all cities in May, but the proportion remains above pre-COVID-19 levels.
Sellers are also becoming more active. As the market softened in March, and the government put in place restrictions on transactions, sales and listings fell dramatically as vendors are reluctant to sell in a weak market.
But there has been a rapid rebound over the past two months. Nationally, new sale listings on Domain in the past four weeks are 19 per cent higher than the previous four weeks (and 37 per cent higher than the four weeks before that).
The most likely scenario by end of 2020 is modest price falls and a slow pick-up in property sales
The most likely outlook for property is for prices to fall modestly in some areas and be broadly steady in others, combined with a slow increase in transactions from weak levels. But given the unprecedented nature of the COVID-19 recession, the outlook for the property market for 2020 is highly uncertain.
The key factor supporting prices so far is that few people have been forced to sell their homes due to losing their jobs or having their incomes cut. This has been enabled by the government's financial support packages assisting households whose income has fallen, in combination with banks allowing people in financial difficulties to defer mortgage repayments.
The Westpac-Melbourne Institute consumer survey data indicates that while people think it might be a good time to buy, there is no rush because they think prices may fall a bit further. This suggests sales volumes will remain sluggish for the next few months.
Perth, Adelaide and Canberra are the property markets most likely to rebound fastest. Prices are likely to grow at a modest pace and sales activity should pick-up. There are few or no COVID-19 cases in these cities, meaning the local economies should be able to operate fairly normally.
In Western Australia, almost all social distancing restrictions will be removed on July 18. The mining sector is strong due to robust demand from China. Perth's rental market has held up well, with the rental vacancy rate back to where it was pre-pandemic and well below the level a year ago. WA's tourism industry is the least reliant of all the states on interstate and international visitors, meaning border closures should have a smaller impact on the economy (see graph).
Canberra's high proportion of public sector employment should mean job losses are limited. In Adelaide, the jobs market has held up over the past few months, and South Australia is also less reliant on international tourists than other states.
Some smaller cities, such as Wollongong and Newcastle, may also see prices hold up due to interest from people looking to move away from big cities. But prices may fall in the Gold Coast and the Sunshine Coast, due to the heavy reliance on tourism, and Geelong's property market may be weighed down by a sluggish Melbourne market.
Holiday and coastal areas near capital cities may become more popular with people more able to work from home. But this factor might be more than offset by people selling holiday homes due to a fall in their incomes.
Some capital cities and other regions will be hit harder by the COVID-19 recession than others. Inner-city Sydney and inner-city Melbourne look to be most at risk of price falls due to having a large proportion of renters and also due to significant job losses, particularly in hospitality (see blue dots in graph below). These inner-city areas are also where a large number of international students typically live. But with borders closed and universities teaching online, international student numbers have fallen substantially.
Asking rents in inner-city Sydney and Melbourne have fallen by about 6 per cent in the June quarter, whereas the outer suburbs have held up reasonably well. Falling rents and rising vacancy rates means many investors may sell, which will push down prices.
Greater Melbourne and Greater Sydney also seem more at risk of price falls than most other capital cities. It's probable that Sydney and Melbourne will be hit hardest by the expected fall in immigration, which would mean a larger fall in property prices.The recent COVID-19 spike in Melbourne will weigh on the economic rebound.
Inner Brisbane, inner Perth, the Gold Coast and Sydney's eastern suburbs also look more vulnerable to price falls due to job losses and a higher proportion of investment properties (see graph light blue dots in graph above), but not to the same extent as Sydney and Melbourne.
Other regions where prices might fall include Cairns and Hobart and the broader Tasmanian market. These areas are heavily reliant on international and interstate tourists, meaning ongoing border closures will result in significant job losses. A softer tourist market has resulted in short-term rentals being listed on the long-term rental market, which has pushed down rents (Hobart asking rents have fallen by about 5 per cent in the June quarter).
There are two big downside risks to a property market recovery
A widespread second wave of COVID-19 infections will derail Australia's economic recovery and likely result in widespread property price falls and a slowdown in transactions. Substantial outbreaks in Australia's major trading partners will also slow the economic recovery.
Governments will also be less likely to offer the substantial financial support that was offered in the initial coronavirus outbreak and banks will also be less likely to offer mortgage deferrals to as many clients. Many businesses that survived the initial outbreak and shutdown may shut if there is a second wave, resulting in a spike in unemployment and a drop-off in consumer confidence. So a second wave will likely lead to an increase in forced sales, which will weigh on prices.
Many countries that have reopened their economies have experienced a second wave of infections, notably South Korea, Israel and Spain, so there is a substantial risk of a second wave occurring.
The scheduled end of the JobKeeper wage subsidy, the higher JobSeeker payment and the end of mortgage deferrals may create a fiscal or economic cliff. This will result in incomes falling significantly for many people combined with the need to make mortgage repayments. If the cliff eventuates, it will likely result in a spike in forced sales, particularly by investors.
The fiscal cliff will severely harm the economic recovery that is underway. Due to this risk, the government should continue to provide support to the most affected households and businesses beyond September, despite recent comments about cutting back spending. The support will probably be more targeted, for example by offering assistance to industries most affected, such as aviation. The government has already hinted that it will raise the JobSeeker payment.
Banks are also likely to offer assistance beyond September to some people struggling to repay their home loans.
Banks have stated that it's not in their interest to force a large number of people to sell their homes. Banks should be able to offer more targeted assistance to borrowers in trouble as the total number of people requiring ongoing assistance will have fallen significantly since April due to the improving economy (as at mid-June 485,000 mortgages, about 8 per cent of all mortgages had been deferred).
There are already some promising signs. The Commonwealth Bank stated that about 15 to 20 per cent of the customers who deferred their loans were making repayments, and about one-third of ANZ customers deferred repayments were now making repayments. In addition to mortgage deferrals, banks are also letting some borrowers switch to interest-only loans or extending loan terms to reduce repayments. Interest rates are also much lower than before the pandemic.
Nonetheless there will be more forced sales at the end of the year, which will put downward pressure on prices if the number of forced sales is significantly more than expected and they happen in a short timeframe.
There is a chance of a rapid rebound later this year
While the downside risks are larger, there is the potential for a more rapid market rebound.
Interest rates, a key driver of property prices, are at record low levels and the RBA has stated that rates will remain very low for years. If COVID-19 outbreaks are contained and the economy recovers, then investors and owner-occupiers will be more willing to borrow and take advantage of greater borrowing capacity.
First-home buyers will also be keen to take advantage of the government incentives such as the First Home Loan Deposit Scheme and HomeBuilder if the job market continues to improve.
If Australia's COVID-19 infection numbers remain very low, and the economy performs better than comparable countries, this will make Australia an attractive destination for skilled migrants due to work opportunities as well as from a lifestyle and health perspective.
International student numbers may also rebound faster than initially expected, with pilot programs to bring students to Australia already underway.
A faster than expected recovery in population growth will support prices and transactions, particularly in Sydney and Melbourne.
**Source: Trent Wiltshire - Domain