Where we are now
While house prices experienced a decline in the June quarter, it has been far from a dramatic slump. And it’s been a story of two parts. Over the last three months, the top end of the Melbourne market saw more expensive properties decline by 3.7%, yet more affordable houses declined significantly less at only 0.5%, according to Core Logic.
We should also remember these prices are still more than 10% higher than they were 12 months ago.
So, despite the challenging conditions, house prices are holding up surprisingly well. A reminder not to believe everything you read in the media…
Our conversations with agents suggest this is due to a shortage of stock, low interest rates and an overhang of purchasers from last year, especially first home buyers. The good news is the numbers of buyers and sellers is fairly evenly balanced, and properties are still selling if they’re priced to meet the market.
The current moratorium by banks on requiring loan repayments has also offered some relief, with no signs of forced selling. In mid-May, the Australian Banking Association announced that since the crisis started, banks have deferred repayments on 429,000 mortgages (that’s 1 in 14) and 205,000 business loans. These numbers are likely to have grown since then.
Banks have announced they will extend this for another four months into next year for some customers.
What the experts are telling us
One driver of property prices is unemployment.
The Reserve Bank predicts our economy will contract by 10% in the June quarter, with hours worked declining by 20% and unemployment rising to 10%. And this is assuming state borders are open and restrictions lifted by the end of September.
Given what’s happening in Victoria at present, these forecasts could be optimistic with some pundits believing unemployment could be 14% now.
More sobering perhaps is research from Swinburne University which shows the housing market is at risk of significant downturn unless the unemployment rate recovers quickly after the JobKeeper stimulus ends. Researchers believe there are currently 24,000 households at very high risk of defaulting on their mortgages - where properties were purchased with low deposits during the boom years of 2014-15 and 2017-18, and the owners are now at risk of losing their jobs. They also believe another 135,000 households are at high risk of defaulting - where there is a high loan to value ratio.
Post JobKeeper landscape
The big unknown is what will happen to property supply once JobKeeper ends (whenever that may be), and banks start requiring loan repayments.
Insolvency practitioners we speak to are expecting a big jump in business failures, particularly at the end of this year and into next. Without JobKeeper, businesses will have to reassess staffing needs in a new business environment, meaning some workers will lose their jobs while others will move to part-time. We know unemployment is a big driver of property supply (either voluntary or through enforced selling) and the experts agree unemployment will rise further.
But it remains to be seen what measures the Government will introduce after September to protect the economy. We can expect substantial government spending on infrastructure projects, particularly those that employ large numbers of workers. However, re-starting the economy will be a slow process.
So, if we’re anticipating property supply will increase after JobKeeper, what about demand?
With international borders closed, immigration is at a standstill and almost no property is being purchased by Asian buyers in Melbourne.
The big positive for property demand is the historically low cost of money. Borrowers can fix home loans for less than 2.3%, and according to the Reserve Bank, interest rates are likely to remain low for some years. So, providing borrowers have secure jobs, low interest rates should give them confidence to buy property.
Anecdotally we also hear many buyers and sellers are waiting to enter the market until after September when the future environment may be more certain. What’s unknown is whether we’ll see more buyers or more sellers…
We also hear that the second lock-down in Melbourne is having an impact on buyers confidence more than the first. Only time will tell.
The depth and duration of the current crisis will undoubtedly determine property supply. The longer lock-down continues, the more strain our economy comes under. We should also remember that Australians have one of the highest household debt-to-income ratios in the world at 195%, and any prolonged disruption to income will inevitably result in property being sold.
At Tower, we don’t see residential property falling off a cliff after September. However, we do see moderate price declines, driven by unemployment, banks requiring loan servicing and no wage growth.
For those property owners planning to sell, acting sooner rather than later probably makes sense.
Robert Allanadale - Director
Tower Property Advisory