Since our last blog, it appears that we may be starting to see some light at the end of the Coronavirus tunnel.
It is pleasing to see that the rate of infection with Covid-19 in Australia is remaining relatively stable at very low levels. With limited community spread, the lockdown is finally beginning to ease. Several states have been reporting zero daily infections and the push is now for state borders and the trans-Tasman border to reopen, and for domestic economic activity to ramp back up.
In Senate Committee testimony on the 28th May, RBA Governor Philip Lowe said the economic downturn might not be as severe as earlier predicted, but “much depends on how quickly confidence can be restored.” The RBA’s expectation now is for a 15% cumulative decline in total hours worked compared to the 20% previously anticipated.
Things appear to be looking up.
So What Can We Expect At The End Of The Tunnel And What Are The Implications For The Property Market?
There are a number of relevant junctures on the way to the end of the tunnel:
· By 30th September 2020 the Government’s JobKeeper and JobSeeker subsidies are scheduled to conclude;
· Also by 30th September 2020, the loan forgiveness initiative provided by the Banks is scheduled to end;
· With full relaxation of the lockdown, property auctions will be able to return to normal;
· Hopefully we will see the discovery and global distribution of a Covid-19 vaccine in early 2021; and
· The recommencement of international travel and migration to Australia should follow.
Each of these junctures has implications for property demand & supply with consequences for property prices.
We previously reported on Agent observations that, although there are fewer buyers due to the Covid-19 pandemic, there are also fewer sellers, and the two appear to be more-or-less in balance. As a result, property prices have remained relatively stable until now.
So What About Demand Going Forward?
Going forward on the demand side, the level of unemployment will be the key to determining if buyers return to the market. No doubt, higher rates of unemployment are yet to be reported, however, the earlier the economy reopens, the lower should be the peak rate of unemployment and the sooner confidence will be restored.
A caveat to this will be if the JobKeeper wage subsidy is withdrawn as legislated at the end of September 2020. Philip Lowe has flagged that the subsidy may need to be, “extended for specific industries or somehow tapered” and this will be key to ‘smoothing’ the return to confidence, particularly for employees of harder hit industries such as retail and tourism. Further stimulus is widely expected with the Government considering a range of initiatives under the ‘JobMaker’ banner, along with several other fiscal measures.
Another major factor on the demand side is interest rates, but these are widely expected to remain at record low levels into the medium term, further underpinning a return to demand.
On the flip side, inbound overseas travel is not expected to return any time soon, likewise migration, so demand for property in the short to medium term will be largely domestic and is unlikely to return to pre-Coronavirus levels for some time.
And On The Supply Side?
A key supply side factor will be the impact of the removal of the loan forgiveness initiatives provided by the Banks, also scheduled to cease at the end of September 2020. Bank profits have been severely hit as a result of the Pandemic and it is unlikely that this initiative can continue beyond its current end date.
Apart from an increase in supply through the discretionary listing of property as confidence returns, the property market may begin to see a ‘flood’ of foreclosures as people not re-securing employment, or transitioning to underemployment, are unable to maintain their loan commitments without ongoing forgiveness from their bank or lender.
One agent that we have spoken to has flagged an increase in the number of foreclosures in unit complexes in suburban Melbourne, based on their discussions with a particular lender.
So again, we appear to have a situation of supply returning, more-or-less in line with demand.
What Part Do Auctions Play?
Another factor to consider is the return to public auctions as the preferred method of sale by vendors, creating increased competition and driving prices up.
The following chart shows the resilience of auctions in the Melbourne market.
Following the ban on public real estate auctions on 25th March 2020, the number of properties withdrawn from auction rose dramatically from 72 to 808. Likewise, confirmed auction results decreased dramatically from 955 on 21st March 2020 to 49 on 16th May 2020. Yet with the public becoming familiar with on-line auctions, and just recently a return to public auctions with a maximum of 20 people, auction clearance rates have returned to pre-lockdown levels of around 60% - 70% after having dropped to 29% on the 4th April 2020.
Admittedly the current clearance rate is from a very low base, but it illustrates the Melbourne markets love affair with auctions as the preferred method of sale, and this can only have a positive impact on prices.
So Where To From Here?
It is difficult to predict the relativity of supply to demand going forward and the resulting impact on property prices.
On balance, there is expected to be ongoing downward pressure on prices as we continue through the pandemic. This was borne out in the latest Corelogic Home Value Index which reported a 0.4% fall in prices nationally for the month of May and a 0.9% fall in Melbourne. However, annually, the Index is still up a healthy 8.3% and 11.7% respectively. Corelogic also reports that sales activity has bounced back by 18.5% in May after a drop of 33% in April.
If the end of the tunnel is regarded as a return of the domestic economy to some semblance of normality towards the end of 2020, then the property market and prices should hold up relatively well. The missing piece however will be the contribution of the overseas market to demand, as international travel and migration from more greatly affected countries remains absent.
If the end of the tunnel is the discovery and global administration of a vaccine in early 2021, then the market should be back to pre-Coronavirus levels through the latter part of next year.
As history and the relatively unchanged property prices to-date show us, the property market tends to be resilient to economic shocks.
CoreLogic’s Head of Research, Tim Lawless, observes that; “Considering the weak economic conditions associated with the pandemic, a fall of less than half a percent in housing values over the month shows the market has remained resilient to a material correction. With restrictive policies being progressively lifted or relaxed, the downwards trajectory of housing values could be milder than first expected.”
What is certain is that, relative to most other countries, we have many reasons to be confident!
Phil Hoopmann - National Property Manager
Phil comes to Tower Property Advocates with extensive experience in the financial services sector with National Australia Bank and MLC, having covered all aspects of transactional banking, product sales and branch management. He has also held a number of senior corporate roles in Human Resource Management and is a qualified Real Estate Sales Representative.