Australian home values have recorded their fourth month of COVID-induced decline, with the CoreLogic home value index dropping a further 0.4 per cent in August.
Although the overall figure highlights a downward trend, CoreLogic notes the fall is not consistent across the board with some areas faring far better than others.
“…at least from a macro perspective, the rate of decline has eased over the past two months and five of the eight capitals recorded steady or rising values through the month,” they note.
Melbourne the major issue
According to CoreLogic’s head of research, Tim Lawless, the Melbourne housing market is the main drag on the headline results.
“Following a similar decline in July, Melbourne home values fell by 1.2 per cent in August, the largest fall recorded amongst the capital cities, demonstrating the impact of a worse viral outbreak relative to other cities, along with a larger demand side impact from stalled overseas migration,” Mr Lawless said.
“Through the COVID period to date, Melbourne home values have fallen by 4.6 per cent. Outside of Melbourne, the remaining capital cities all recorded slightly better conditions relative to July.
“The rate of decline eased across Sydney and Brisbane, while home values held firm or showed a subtle rise across the remaining capitals.
“The performance of housing markets are intrinsically linked with the extent of social distancing policies and border closures which also have a direct effect on labour market conditions and sentiment.
“It’s not surprising to see Melbourne as the weakest housing market considering the extent of the virus outbreak, and subsequent restrictions, which have weakened the economic performance of Victoria,” Mr Lawless said.
“Looking forward, we are likely to see a diverse outcome for housing markets around Australia, depending on how well the virus is contained and the regions exposure to other factors such as its reliance on overseas migration as a source of housing demand.”
Regional markets outperforming capitals
Regional markets have continued to outperform their capital city counterparts across the largest states.
While CoreLogic’s combined regionals index has lost momentum relative to the pre-COVID trend, the index has held virtually flat since May.
Mr Lawless explained there are a variety of factors helping to support regional housing market conditions.
“Unlike their capital city counterparts, which usually receive 85 per cent of net overseas migration, most regional markets have avoided the drop in demand caused by the pause in migration.
“Regional markets may also be appealing for their relatively low density and lower price points. The normalisation of remote work through the pandemic could make proximity to major cities less of a factor in home purchasing decisions.”
Advertised inventory insulates values
CoreLogic goes on to note a low level of advertised inventory is continuing to insulate the market.
“Through the COVID pandemic to-date, active listing numbers have remained extremely low, demonstrating both a lower than average amount of fresh stock being added to the market, and a strong rate of absorption,” Mr Lawless said.
“So far there has been no evidence of urgent or distressed listings starting to pile up.
“This could potentially change however as fiscal support starts to taper at the end of September and distressed borrowers taking a repayment holiday reach their six month check-in period around the same time.
“The timing of these two events could be the catalyst for a gradual rise in distressed listings which will be an important trend to monitor,” Mr Lawless continued.
“If we do see active listing numbers rising to be higher than previous years, it could signal that vendors will need to offer up greater discounts in order to sell their home.”
Less active spring selling season
CoreLogic predicts the upcoming spring selling season will likely be less active than normal this year.
“Spring is a period where the housing market typically becomes more active, from both a sales and listings perspective,” they state.
“Heading into spring, the trend in advertised listing numbers and home sales is trending in the opposite direction; new and total listing numbers are reducing and sales activity slipped by an estimated 1.9 per cent in August.”
Rents holding up better than housing values
Nationally, capital city rents have held up better than housing values. Since the end of March, capital city dwelling rents are down 1.4 per cent compared with the 2.3 per cent drop in dwelling values.
Despite the apparent resilience, CoreLogic says a more substantial performance gap is opening up between houses and units across the rental sector.
Since the end of March, capital city house rents are down by a modest 0.3 per cent, while unit rents have fallen a more substantial 3.5 per cent with rents underperforming relative to house rents across every capital city.
The difference is most significant in Melbourne and Sydney where there is approximately a 3 percentage point variance between the fall in house rents compared to unit rents.
Hobart has also recorded a significant drop in unit rents through the COVID period, falling 5.1 per cent.
According to Mr Lawless, weaker rental conditions across the unit sector can be attributed to a combination of high supply and low demand.
“Supply levels for rental grade units have surged over recent years, especially in Sydney and Melbourne, where high-rise unit supply across key inner city markets has remained substantially above average.
“At the end of March there remained around 51,000 units under construction across NSW (+19 per cent on the 10-year average), and about 45,000 units were under construction across Victoria (+24 per cent above the decade average).
“On the demand side, rental demand for inner city apartments has been significantly impacted by stalled overseas migration, including foreign students, as well as less demand from domestic students who are generally studying from home.
“Rental demand has also been impacted by weak labour market conditions across industry sectors common with renters, including the food, accommodation, arts and recreational services sectors.”
Meanwhile, CoreLogic rental listings data shows advertised rental supply in select inner city areas has more than doubled between mid-March and early August.
“With high supply and weak rental conditions likely to persist, at least until international borders re-open, inner city investment unit values are likely to remain under significant downside risk,” they state.
