House price growth begins to slow

Despite the unprecedented social distancing measures put in place to stop the spread of the coronavirus, home values across the country pushed higher in March.

According to the latest data from CoreLogic, prices rose by 1.1 per cent in Sydney, 0.4 per cent in Melbourne, 0.6 per cent in Brisbane and Canberra, 0.5 per cent in Perth and 2 per cent in Darwin, with values posting a surprise 0.2 per cent fall in Hobart.

Over the past three months, Sydney was the strongest performing housing market, jumping by 3.9 per cent, while Melbourne also showed strong growth at 2.9 per cent.

The combined capital cities showed growth of 0.7 per cent in March, however, the month appears to be a tale of two halves, with price growth slowing later in the month on the back of the social distancing measures that have been put in place.

CoreLogic’s Head of Research Tim Lawless said that while social distancing measures will likely be disruptive, the market has been strong since last July.

“Although Australia’s housing markets have begun to enter a period of disruption, they are coming from strong foundations,” Mr Lawless said.

“The housing market won’t be immune to a drop in sentiment and weaker economy, however, the extent of the impact on dwelling values remains highly uncertain.

“Capital growth trends will be contingent on how long it takes to contain the virus, and whether additional constraints on business or personal activity are introduced.”

Source: Corelogic

House values to remain insulated
Mr Lawless said he believed the current crisis will likely reduce transactions in the short-term, while the government stimulus measures will help protect values.

“We are expecting the number of residential property sales to fall dramatically over the coming months – a consequence of tanking consumer confidence, a rising jobless rate, and more cautious lending practices,” he explained.

“Restrictions on open homes and on-site auctions will compound the slowdown in buyer activity, as would any future policy announcements related to peripheral services such as building and pest inspections, conveyancing and furniture removals.

“Considering the temporary nature of this crisis, along with unprecedented levels of government stimulus, leniency from lenders for distressed borrowers and record low interest rates, housing values are likely to more be insulated than sales activity.

However, Mr Lawless said the extent of any fall in housing values was impossible to fathom without first understanding the length of time this health and economic crisis persists.

“Arguably, the longer it takes to contain the virus and bring economic operations back to normal, the higher the downside risk to housing values,” he said.

Top end of town to slow down
At the high end of the market, the quarterly growth rate fell from 6.6 per cent over the December 2019 quarter, to 3.6 per cent over the March 2020 quarter. 

Mr Lawless said higher-priced properties are starting to become unaffordable and buyers are starting to look for cheaper options.

“Considering the stronger conditions evident across the top quartile of the largest cities, this sector is now becoming significantly less affordable and demand has been rippling towards housing where values are more affordable,” he said.

“Cyclically, the higher value segment of the market has traditionally led lower value segments, particularly in Sydney and Melbourne.

“Given the recent deceleration in the growth rate of this segment, it could be a signal that growth will start to slow more broadly in the coming months.

“The coronavirus impact is likely to be broad-based across the different value segments of the property market.

“A large proportion of jobs losses have been in lower-paid sectors, such as hospitality, travel or tourism. However, equity values have also been hard hit, which could contribute to weaker demand across the higher value segments of the market.”

Downside risk remains
Mr Lawless predicted that despite the uncertainty in the near term, the market and the economy will bounce back quickly.

“The outlook for housing values is less certain,” he said.

“Leniency from the banks for borrowers facing financial hardship should help to stymie the number of distressed properties hitting the market.

“Similarly, the massive federal and state government stimulus packages will help to support job retention and incomes.

“Also, the temporary nature of this crisis implies that most home owners will do their best to weather the storm, hoping for an eventual upside as the virus is contained and economic conditions improve.

“No doubt there is a rising level of downside risk to housing values which is compounded by the fragile state of household balance sheets, which on average, are heavily leveraged.

“The wildcard remains the sheer uncertainty of how long this health crisis and associated economic disruption will persist.” 

Mr Lawless said that once the virus is contained, he expected economic conditions to quickly improve, driving a turnaround in consumer spirits which should flow through to housing market activity.

“When that will be, remains highly uncertain,” he said.

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.