Further property price falls ahead: Shane Oliver

EXPERT OBSERVER

The pace of home price growth has slowed from a peak of 23.8% annualised in November (or 2% month on month) to now a contraction at a -9.6 annualised pace in both June and July (or -0.8% month on month).

The rebound in property prices from around mid-last year ended in April and the hit to the economy from the coronavirus shutdown and associated uncertainty is now driving property prices down. Were it not for JobKeeper, the increase in JobSeeker, the bank payment holiday and other support measures protecting heavily indebted households and property investors, prices would be falling more rapidly in response to forced sales. As a result we are still in a bit of a twilight zone as support measures help protect the property market and keep price falls gradual.

Auction clearance rates are up from their April shutdown lows but sales volumes remain very soft particularly in Melbourne which has been hit by an intensifying lockdown over the last month. See the next two charts. 

Outlook

Further falls in home prices are likely. High and still rising unemployment (with “true” unemployment absent government support measures estimated to be just above 11%), the collapse in immigration which has reduced underlying dwelling demand by around 80,000 dwellings a year (see the next chart which shows the collapse in population growth relative to housing completions) and the depressed rental market will likely combine to drive weak housing demand and increased forced sales. JobKeeper, increased JobSeeker, bank payment holidays and other support measures have so far helped head off a sharp collapse in prices but the market has still weakened anyway and we expect an acceleration in falls as support measures start to be tapered from the December quarter. Sydney and Melbourne are the most vulnerable given their higher dependence on immigration, higher debt to income ratios, higher house price to income ratios and greater investor penetration.

Source: ABS, AMP Capital

The resurgence of coronavirus cases and the renewed negative impact of this on the economic recovery via Melbourne’s stage 4 lockdown, the reversal of some reopening measures in the rest of Australia and reduced confidence has caused us to revise our base case for the decline in national average property prices down to a 10 to 15% top to bottom fall (from a 5 to 10% fall). However, this masks a wide divergence between cities with Melbourne likely to see a 15-20% decline (of which its already fallen 3.5%) partly reflecting the bigger hit to its economy from its ongoing lockdown, Sydney prices likely to see a 10-15% decline (of which its already fallen 2.1%) whereas Adelaide, Brisbane & Hobart are only likely to see falls around 5% and Canberra prices are likely to be flat to up. Perth looks a bit more fragile despite having seen a 22.3% decline from its 2014 high and so prices there are likely to fall 5-10%.

However, if the resurgence in coronavirus cases in Victoria morphs into a broader “second wave” of cases across Australia necessitating a renewed economy wide lockdown and a renewed broad based downturn in the economy then the likelihood of a 20% plus decline in prices will escalate. We are also assuming more government stimulus to be announced in the months ahead – but if it’s not forthcoming it would also add to the risk of a sharper fall in property prices than in our base case.

SHANE OLIVER | Head of Investment Strategy and Chief Economist | AMP Capital