Australia's largest retail bank is
forecasting tough times ahead, it's just a matter of how bad things will get.
The Commonwealth Bank have a serious stake in the housing market, with the
largest slice of the property pie in the entire country. This single
institution accounts for around $446 billion in mortgage debt, which makes its
predictions even more sobering. After benefiting from rising capital city
prices over recent years, the bank understands the likely outcome of recent
lofty valuations colliding with a huge global downturn.
Two distinct scenarios were released in the
bank's March Quarter update, with reality likely to fall somewhere in-between.
There is a huge discrepancy in the two scenarios, which highlights vast
unknowns related to the pandemic and its effects. In the least disastrous
scenario, the market falls by 11% over a period of months, picking up slowly in
2021 based on the extent of unemployment and overall economic recovery. These
figures are based on an unemployment rate of 8.25% later this year, which is
looking very likely.
However, if property prices do plunge 32%
under the worst-case scenario, prices will revert to levels not seen for more
than a decade. This would eclipse the previous largest fall on record, and
potentially shave as much as $300,000 from the median Sydney house price. Under
this scenario, 7.1% would be wiped from the Australian economy this year alone.
If this all seems a little pessimistic, it's only slightly above IMF
expectations and those made by Treasury.
Housing figures will be largely dependent
on unemployment numbers, which are likely to slide considerably over the coming
weeks and months. Treasury is bracing itself for a 10% peak in unemployment
later this year, with numbers improving gradually in 2021 as they return to
6.5% in 2022. The most prolonged Commonwealth Bank scenario is mostly in
agreement, with unemployment expected to reach 9% this year, 8.5% in 2021, and
6.5% in 2022.
According to Treasury, the Australian
economy will shrink 6% this year, before stalling and growing by the same
margin in 2021.
According to the worst Commonwealth Bank
scenario, however, this is somewhat optimistic, with the economy continuing to
shrink 0.8% next year and growth not returning until 2022. While the worst-case
scenario is unlikely by definition, Australia's largest bank has taken out
insurance against a major downturn with $1.5 billion set aside to cover the
expected rise in job losses and associated bad debts.