Despite the massive impact the COVID-19 pandemic is having on the economy worldwide, Australian property analysts say there are still reasons to be optimistic about the industry in 2020.
According to CoreLogic‘s March Quarter Property Market & Economic Review, released this week, historically property values have remained relatively insulated in times of negative economic shock, but transaction numbers will likely take a hit, new housing demand will continue to decline, and rent prices will also be impacted.
CoreLogic Head of Research Australia Eliza Owen said the same phenomenon is currently playing out, as the combined capital cities markets have only just begun showing mild value falls of less than 0.5 per cent in the past month, while CoreLogic estimates suggest the
number of sold properties declined around 40 per cent over April.
“The economic outlook for the Australian economy prior to COVID-19 was modestly positive,” Ms Owen said.
“Growth in housing market values was expected to extend over 2020, though it was anticipated that growth momentum would slow in the wake of affordability constraints, and higher levels of listings.
“Amid the onset of COVID-19, and the resultant economic shutdown, the operating environment for the housing market has completely changed.
“On aggregate, the Australian housing market is now on the cusp of another
Job loss will make a big impact on Australians’ abilities to purchase property, with ABS unemployment figures released in May showing almost 600,000 Australians had lost their jobs in April, and the unemployment rate increased from 5.2 per cent to 6.2 per cent.
Ms Owen said the majority of Australian Businesses (97.4 per cent) in Australia are made up of less than 20 people, and these are the businesses that tend not to have large capital reserves in the case of a downturn.
“This is why much of the government stimulus has been targeted at small-to medium sized businesses,” she said.
While negative economic shocks do not necessarily lead to severe declines in property prices (by early May, capital city housing values fell by less than 0.5 per cent over a month), Ms Owen said that due to the temporal nature of the COVID-19 downturn, vendors may hold high expectations for their property value and simply hold off selling until the economy returns to full-scale production.
This in turn affects the number of property transactions, which have seen more drastic declines in response to economic shocks, and could be even more affected amid the COVID-19 downturn.
CoreLogic modelled sales volumes suggest that across Australia, residential property sales declined about 40 per cent over April.
“The magnitude of decline was fairly uniform across different parts of the country, and was driven by a decline in consumer confidence,” Ms Owen said.
CoreLogic listing data shows the amount of stock available for sale is about 25 per cent lower than it was around this time last year.
“The low level of listings signals a tough period for those developing and selling residential real estate. But it also signals a lack of distressed sales flooding the market,” Ms Owen said.
“In other words, not many people are selling, because not many people have to sell.”
The report said it was likely that reprieve on mortgage repayments had protected people from distressed sales, at a time of rising unemployment, falling wages and falling numbers of hours worked.
Rent prices are likely to be more affected than property prices – CoreLogic recorded a -0.4 per cent decline in rent prices nationally across Australia over April, led by Hobart, where rents declined -1.1 per cent.
“Rental markets have been particularly dampened by falls in employment. This is because jobs have fallen by about a third across accommodation and food services, and arts and recreation services,” Ms Owen said.
“These are industries where workers are generally young, on less income, and are more likely to be renters.”
Prior to the onset of COVID-19, housing finance conditions were eased, including the halving of the cash rate between June and October 2019, but monetary policy and financial regulation has sharply shifted in response to COVID-19.
“Policies now focus around deferring the implementation of a more conservative lending environment, ensuring high levels of liquidity among lenders, and ensuring low-cost debt to encourage spending.”
CoreLogic reports that the target cash rate is at the effective lower bound of 0.25 per cent, and will likely stay there for years.
“The RBA have adopted a record-low cash rate of 0.25 per cent, which has previously been referenced at the ‘effective lower bound’,” Ms Owen said.
“This means that further reductions in the rate would not see any added benefit to the economy.
“Reductions in the cash rate typically have an inflationary effect on house prices, with a 1 per cent reduction in the cash rate increasing property prices by about 8 per cent over two years.
“However, due to extraordinarily low levels of consumer confidence, it is less likely that the record low cash rate would.”
According to the Australian Prudential Regulation Authority, banks were already in a strong capital position before the onset of COVID-19.
The indicator APRA uses to illustrate this is the CET1 ratio, which refers to the required portion of capital banks must hold against the risk component of assets.
“APRA acknowledged that in the current environment, it would be acceptable for these capital ratios to sink below the additional, high capital requirements set in 2017, provided banks can still meet minimum capital
requirements,” Ms Owen said.
“This will give banks more room to lend in the coming months.”
However, she said if reductions in income mean this debt cannot be serviced, there may be increased incidences of distressed sales, which would bring broader housing market values down further.
“It is worth noting that no such signs of distress are yet visible in the housing market,” Ms Owen said.
“This is supported by a very low level of for sale listings.”