A cloud of uncertainty is hanging heavily over the Australian residential property market, as it is over most parts of the global economy. The simple truth is that we don’t know the end destination for this COVID-19 health crisis, and until we do, it is hard to predict the long-term effects on asset values.
We can, however, read the indicators as they arise and at least gain an understanding of the dynamics currently driving the market. For Australian house prices, the immediate outlook is not rosy, but in the context could be much worse.
Dynamic 1: Demand softens along with the economy
Auction clearance rates in most major capital cities have tanked1, however to this point the data may reflect logistical challenges as much as decreased demand. With group inspections and live auctions now prohibited, many sellers have withdrawn from the market. Listings have also increased, due in part to sellers rushing to enter the market before the situation deteriorates further.
Over coming months, however, the hit to economic activity from lockdown measures will take over as the dominant feature in the market, smothering demand and putting downward pressure on prices. Uncertainty is a major factor in this, with buyers reluctant to enter the market in the current geopolitical climate, and rental holidays and non-payments destabilise cash flows in the sector.
Ultimately, as the unemployment rate climbs towards 10 per cent there will be very significant income effects as well, as household budgets come under strain and access to credit is reduced for those who have lost jobs or taken pay cuts.
Finally, lower levels of population growth due to decreased immigration is also likely to have deflationary effect on the market.
Dynamic 2: Supply cools over the medium term
Current approvals data pre-dates the pandemic, but have been trending downwards since late 2017, despite a recent spike in February. As demand declines, expect to see further downward pressure on residential construction activity, which will in turn act as a drag on economic growth.
Alongside cooling demand, practical difficulties may also play a role in dampening construction activity. Material supply shortages have been a concern to the industry2, although these fears may be alleviated as Chinese production comes back online. Another looming threat would be additional restrictions on movement affecting jobsites, which to this point have been relatively unscathed by public health interventions.
Previously we had be worried that diminished construction activity would create an undersupply in Sydney and Melbourne, however we now expect falling demand to dominate market conditions, in the short term at least, leading to a fall in house prices nationally in the order of 5-10 per cent. This is predicated on unemployment rising towards but not exceeding 10 per cent. If this proves to be overly optimistic a larger collapse in the housing market could eventuate.
If government intervention is successful, or if there is a significant stabilisation of the pandemic, unemployment rates may start to return to normal levels, at which point the effects of our low interest rate environment will start to kick in again, which should bring some upside to home prices.
Subscribe below to SMSF News to receive my latest articlesDiana Mousina, Senior Economist
While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.