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House Prices Remain Resilient

The health of the Australian property market is closely aligned with domestic and global economic conditions. While COVID-19 is sure to have an effect on prices and activity for months to come, the large and resilient nature of the market may be impacted by the pandemic less than originally thought. At the height of the health crisis, there were expectations the value of Australian homes would drop by as much as 10% or even more. While it's still early days, and global stability is far from certain, an annual fall of closer to 5% looks increasingly likely.

According to property data firm CoreLogic, property figures from May indicate a more moderate position than just a few weeks ago. Recent data to the end of May shows national prices falling by around 0.4%, with this number now expected to grow to around -5% over a period of 12 months. It should be noted, however, that this prediction is based on a continued improvement in reported COVID-19 cases, which is far from a given. As we have seen from the situation overseas, the pandemic continues to grow and shift its focus as global economies re-open and adjust. 

Early on, Australia was in an unprecedented health and economic situation that was very hard to read. While the effects of the crisis have been very real, including growing unemployment, reduced foreign capital, and zero international migration, the flow-on effects to the housing market have been greatly minimised so far. Unlike the tourism and hospitality sectors, that have almost no insulation from the crisis, the property market is slow to react and grounded in much longer economic cycles.

According to Professor Shaun Bond from the University of Queensland Business School, “Given the more positive outlook, I believe the potential fall of 10% that was widely discussed at the start of the crisis is less likely now... My expectations are for more modest falls in the headline house price measures over the next few months... If this trend continued, it would suggest an annual fall of close to 5%.” Along with better virus outcomes, Professor Bond said the current low interest rate environment and increasing consumer confidence levels are likely to limit damage from the crisis.

As we have seen in virus cases and restrictions, Australia is a broad land with far from consistent state responses. Differences between states are also likely to play out in the property market, with large and isolated markets more likely to experience a bigger downturn. According to Professor Bond, “As predicted, Sydney and Melbourne fell by more than the other capitals, with the exception of Perth and Darwin,”  Markets in Canberra, Adelaide, and Hobart have shown “remarkable resilience", although regions outside the state capitals with strong links to tourism will face ongoing pressure for months to come.

The long term impact of COVID-19 is almost impossible to read, especially given the reliance of so many Australians on government funded recovery programs. According to Professor Bond, “Many analysts are concerned about what happens when JobKeeper payments run out in September and also when banks become less willing to extend loan terms for impacted borrowers." With the downturn much shallower than many experts were predicting, there is a very real danger that it could also be more protracted. 

The spring and summer selling season will be a critical time, with Australia already in a recession and jobs likely to be hard to come by for some time. While all existing mortgage holders are likely to face some distress, investors may suffer a double whammy due to increased vacancies or reduced rent on their investment properties. Despite the uncertainty, however, good news is good news, at least for the time being. The true shape of the downturn won't be known for months, and will be just as dependent on global conditions as it is on Australia's well-earned recovery.