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Property values holding on amid COVID-19 crisis – for now

While the COVID-19 downturn has had a dramatic impact on agent activity and listings volumes in residential real estate, reports indicate that so far the value of dwellings has been relatively resilient.

It’s still likely that property values will fall amid the downturn, but according to CoreLogic the decline in momentum across property values has been mild relative to what has happened in market activity.

In the 28 days ending 21 April, the change in value was still positive at 0.4 per cent, although momentum in this positive growth rate has slowed from 1.1 per cent halfway through March.

Although much of this is good news, Head of Research Australia at CoreLogic Eliza Owen warned we may still see property values plummet yet, particularly if Reserve Bank Governor Phillip Lowe prediction of the worst economic contraction since the 1930s come true.

Lowe suggested that by June 2020:

  • National economic output was likely to fall by 10 per cent;
  • Total hours worked would fall around 20 per cent; and,
  • The unemployment rate could reach 10 per cent.

Ms Owen said extreme contractions in the economy could exacerbate the structural risk of high housing debt in Australia. At December 2019, the housing debt-to-income ratio rebounded to its record high of 142.1 per cent.

“With large losses in jobs and hours worked, the same level of income is not available to service high housing debt,” she said.

“This would presumably mean more people having to sell property, or a larger volume of distressed sales.”

At the moment, listing volumes are still low – in the 28-days ending 19 April, new listings volumes were -28.7 per cent lower than they were in the same period last year and the total listing stock of dwellings for sale in the same measurement period were down -23.8 per cent.

“The fact that listing volumes and seller activity is so low, and therefore available housing supply constrained, may be one factor preserving relative stability in property prices,” Ms Owen said.

“Another related factor may be vendor expectations. The fact that this is a temporary, enforced downturn means that vendors might be holding onto a relatively high expectation of their property value, with a view to sell once the economy returns to full-scale production.”

Ms Owen identifies the pause on mortgage repayments being offered by banks as another key factor in the stability of property values.

She predicts financial regulators, the RBA and the banking sector may extend reprieve for mortgage repayments in the scenario that the economy has not made improvements within six months, but said that even once the economy returns to a state of normalcy, some households will have un-paid interest capitalised on their loan.

“This increases the amount of debt held,” Ms Owen said.

“For leveraged households in severe stress from the result of COVID-19, greater assistance may be required in this scenario – particularly where the government and banking system will have a far lower interest rates on debt than mortgage holders for years to come.”

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