Shane Oliver: House prices to crash 20% on virus

Shane Oliver of AMP Capital has forecast that the coronavirus pandemic and measures to contain it will see Australia’s unemployment rate surge from 5.1% currently to around 10%. He adds that this could result in capital city house prices falling by about 5% at best and 20% or more in a worst-case scenario:

Auction clearance rates and sales momentum are showing some signs of slowing this month. This may reflect an increasing desire on the part of buyers and sellers to put property transactions on hold to avoid being exposed to the virus unnecessarily. Social distancing policies will only intensify this. On its own this may crash transactions but may just flatten price gains.

Recession is the big threat

However, it’s the likely recession that we have now entered due to coronavirus related shutdowns that imposes the big risk. We expect at least two negative quarters of GDP growth in the March and June quarters with the risk that the September quarter is also negative. And the contraction could be deep because big chunks of the economy will be largely shut – tourism, travel, and entertainment with a severe flow on to parts of retailing. The toilet paper, sanitiser and canned/frozen food boom may help supermarkets for a while – but as Deutsche Bank recently calculated for every $1 spent on such items there is $15 spent on things that are vulnerable to social distancing.

Past large share market falls have seen a mixed impact on property prices. The 1987 50% share market crash actually boosted home prices as investors switched from shares to property. But the key is what happens to unemployment as this often forces sales and crimps demand. Back in 1987 the economy remained strong and unemployment fell but the recessions of the early 1980s and early 1990s saw falls in average national capital city home prices of 8.7% and 6.2% respectively as unemployment rose. The GFC share market fall of 55% also saw a 7.6% home price fall, even though it wasn’t a recession, because unemployment rose from 4% to nearly 6%.

…if the recession turns out to be long – pushing unemployment to say 10% or more – then this risks tripping up the underlying vulnerability of the Australian housing market flowing from high household debt levels and high house prices. The surge in prices relative to incomes (and rents) over the last two decades has gone hand in hand with a surge in household debt relative to income that has taken Australia from the low end of OECD countries to the high end.

This is nothing new and we have long described it as Australia’s Achilles’ heel…

We have always concluded that the combination of high prices and debt on their own won’t trigger a major crash in prices unless there are much higher interest rates or a recession. Unfortunately, we are now facing down the barrel of the latter. A sharp rise in unemployment to say 10% or beyond risks resulting in a spike in debt servicing problems, forced sales and sharply falling prices. This could then feedback to weaken the broader economy as falling home prices lead to less spending and a further rise in unemployment and more defaults and so on. This scenario could see prices fall 20% or so.

Bear in mind though that part of this would just be a reversal of the 9% bounce in average capital city prices seen since mid-last year.

It’s also not our base case but it highlights why governments and the RBA really have to work hard to avoid letting the virus cause a lot of company failures, surging unemployment and household defaults.

A rise in unemployment to 10% seems optimistic, which also means that house prices falls of 20% are lowballing.

A lot will depend on the federal government’s stimulus response. If it provides a backstop to households and small businesses via a temporary universal basic income, then the damage will be limited and there will be far fewer forced sales and defaults.

Leith van Onselen


  1. Interesting anecdote – two auctions in my local area have been brought forward from Saturday to tomorrow. I suspect this is happening across Aus wherever the agent is confident he has enough buyers interested to get a sale.

  2. Nauseating article in domain, speculators need to be looked after

    • Inevitable but not politically tenable without direct household assistance first I’d say.

      Just talk to keep IP owners hanging on in hope

  3. Hang on, if we have a 20% fall from the current re-inflation back to near-all-time-highs, we’re still at stupidly high values versus incomes, which are going to get smashed as the virus administers a VRP to the nation en masse.

    20%? Tell him he’s dreamin’!

    • Even once the guts of the crisis is over the damage will be long-lasting. Unemployment isn’t suddenly going to plummet and the economy get back to what it was doing before. I reckon the weakness in property actually comes after the crisis has passed – household balance sheets will require some major repair and there is always the danger that C-19 makes a return down the track.

      • Yeah, spot on.

        Given so many of the people now unemployed are from hospitality and services industry, they need people to be out and comfortable to spend on meals, drinks, coffee and luxury items before they’ll find their time wanted. Good luck with that in the rancid debt-hole that is Australia.

  4. Oliver gives the wealth effect a wide berth (or ignores it altogether). Kind of concering really as you would think that it has an important role to play in house prices (feedback loop).

    • adelaide_economistMEMBER

      The wealth effect is interesting because it’s often referred to but the literature on it (including by our very own RBA) suggests it’s pretty weak. Yet it doesn’t stop them referring to it or making policy based on it. It’s also a bit of a mystery how it only ever seems to work in one direction (the upwards one), which flies in the face of human nature (people notice negative things more than positive). The mental contortions used to avoid noting this in the RBA’s research is actually pretty funny if you find nonsensical verbiage from a central bank to be humorous.

      • +100
        We’ve seen during this recent bounce in Sydney/Melbourne house prices a complete absence of the wealth effect – no consumer follow-through. It beggars belief that this is referred to in academic circles. There is no reliable correlation. It appears to be more broadly attached to aggregate household confidence in the future than anything else.

    • migtronixMEMBER

      Agreed. Even without unemployment this forced shutin will put pressure on a lot of families – read divorces and forced house sales.

      Morrison is the property PM who heralded the 1890s
      Is property crash 👍

  5. If it provides a backstop to households and small businesses via a temporary universal basic income, then the damage will be limited and there will be far fewer forced sales and defaults.
    Nope. The govt thinks it’s done enough with the 3-6month mortgage holiday it’s brokered with banks… and the rest goes to those who “need it”. Have a look at the speech on how everyone needs to chip in, incl landlords.

  6. Speaking to my colleague, she has $1.3m in debt, lives in one apartment and rents another, the one she’s renting is rented by a chef, who she said is not going to stick around….I asked her if she can cover the repayments, and she said just!!! there will be worse out there

  7. david collyerMEMBER

    A 20% drop will mean equity erasure for many ‘Gearers. Alongside, rents are set to drop too – they are a function of wages, not holder expectations. ‘Gearers will enjoy forbearance from the banks for a while, but not forever.

    Now the state governments have moved to annual valuations, their land tax is set to fall in lockstep with land prices. There, that will put a beaming smile on these glum faced loosers.

    • I suspect, given the already guaranteed damage to State finances, that the land valuations may be a little ‘sticky’ on the way down.

      • david collyerMEMBER

        I disagree, Dominic. State Treasuries understand and prize taxes that operate as automatic stabilisers as annual revaluations for land tax and council rates now do.

        There is a risk state governments will fiddle schedules to raise more revenue, though that would require explicit action. And council rates are derived from their desired budget, of which land valuations are merely the denominator.

        Land tax is a voluntary tax: if you don’t like paying it, don’t own land.

        • I live in QLD where State debt is already approaching ‘unmanageable’ — one of two things will happen: taxes / rates will rise or thousands will lose their jobs and/or salaries slashed, whatever Anastasia feels about the situation. The RBA has not yet committed to fund state deficits although I guess that could all change shortly.

          Inflation here we come

  8. adelaide_economistMEMBER

    Funny isn’t it how the ‘fundamentals’ of property are so very strong that even a global pandemic and massive economic dislocation can’t touch them yet even the threat in years past of the RBA putting up rates by .25% or some tame restrictions on negative gearing were absolutely totally without question going to cause carnage.

  9. Don’t start sucking each other’s d1cks just yet

    In a 0 or negative interest rate environment, with indiscriminate government stimulus, there is a good chance property does not come down much at all

    And now they’re giving noncitizen vibrants free money too

      • Display NameMEMBER

        Lot of balls in play
        – IO rate reset still in play (biggest year I think 2020)
        – Fires
        – Drought
        – Covid 19 shutdown
        – Tourism and education sectors smashed
        – Build Sector (25% of economy) about to crash according to more than a few pundits
        – Lots of unemployment
        – 30% mortgage stress BEFORE this kicked off
        – Why is Iron ore still $80??? Cant see how much longer it can defy gravity.

        Cannot see how you dont get a big reset in this environment, There is zero good news. Low rates is not good news in this market.

    • But before I start sucking yours I might just ring around and see how much the banks are willing to lend an unemployed person on Newstart (with the virus kicker, of course – that could add $200k to the eligible amount I’m sure. Who knows?). You’ve got me very excited, by the way – I’m sniffing an upgrade to my current place – it’s looking a bit tatty after all.

      Aside from insolvency practitioners, medical staff and select consumer products manufacturers I’m not sensing there are too many who would qualify for a fat mortgage right now (much less have the time to give thought to the idea).

      Anyhoo, stranger things have happened and I give credit where it’s due, but my money at this time is on an ugly outcome.

      • who’s selling their house during a pandemic, when the banks have declared they are not foreclosing and are going to mark to fantasy?

        Of course no one will. Even the unemployed don’t have to anymore

        They will wait until after the pandemic is over, when production and consumption goes into overdrive

        And interest rates at 0% (the RBA “looking through” inflation)

        • Display NameMEMBER

          Absolutely right. No one is going to sell by choice in the next 6 months.

          The effects of the covid shutdown and the current poor handling by Scummo and his cronies will see them constantly playing catchup to the crisis. That in turn will keep sentiment low . At some point the combination of unemployment, rock bottom sentiment will spill over into forced sales that lower prices. Only takes a few. Marginal seller etc.

          I cannot a a V shaped recovery. Or a U one. Looks like an L as far as the eye can see.

          And I find it hard to believe with as bastardized an economy as ours that there will be some hidden gems to kick it off again. I suspect the counter case, There is more likely more pain ahead after kicking every ball down the road for almost two decades.

          • maybe for the right price

            so they can buy other distressed assets

            But there will be very few forced sales

            Volumes will be extremely low

          • Sorry – misunderstood / missed the nuance on forced.

            We’re on market by choice. Can easily pull from market and wait. Lifestyle move (downsizing+diff school zone for the eldest), not forced.

          • No

            They’d be silly to sell into soaring unemployment

            The banks have said they don’t have to make repayments anyway, so why would anyone be forced into sale

          • People are forced to sell because there are other holding costs besides mortgage – rates, utilities, strata, insurance and maintenance. Unless you can somehow suspend those as well, unemployed people will have no choice but sell. Oh, and how’s the combustible cladding and collapsing Opal/Mascot towers going?

    • Err.. The fact that an EX-TRADE MINISTER has chosen this moment to sell property should tell you more about which way the prices are heading.

      • Talk up the market, then offload it to the next sucker. After that, you can then openly declare that market will tank and only losers hodl.

  10. He who panics first panics best, lots of high end properties hitting the market in Killcare Heights 2257, when the rich start to run for the exits then you know that the crash is on like Donkey Kong ….

  11. I’m looking forward to the recently purchased duplex acquired by a couple of Nepalese men be put back on the market, they can take their flag off their front lawn, although won’t be long before I do it for them

    • Just reinforces my belief that the banks will be left with a lot of bad debts and a large portfolio of properties as people decamp to their homelands. ScoMo’s idea of insisting the banks not foreclose certainly hasn’t factored in voluntary abandonments. Negative equity is real beatch.

      • adelaide_economistMEMBER

        It’s the special advantage many migrants of dual citizenship and/or temporary residence have, underwritten by long suffering taxpayers. If the house at Tarneit or the Southbank apartment surges, they make bank. If it all falls down, they flee back to a country where the ability of Australian law to even begin to try and collect on debt is basically zero in practice. Young Australian citizens have no such privilege. Just another way this country screws its own over.

        • Yep, they (the visitors) possess a very valuable call option indeed. Sadly, it will take a crisis in which these call options are exercised quite widely to make this clear to everyone. However, unless the bank shareholders bear the full brunt of this any meaningful change is unlikely — with the Big 4 being ‘SIBs’ they effectively have the taxpayer standing behind all their reckless behaviour.

  12. House price now depends mainly on how much money central banks prints….house bubble is at the point of time while the central bank bubble prevails its existence…

  13. What’s the psychology of the person with a million + mortgage? Hold on and hope all other property owners maintain the faith or get out while I can and reassess, bearing in mind if that prices did come down (which is probably more likely than unlikely at this stage no matter which way you cut it), I run the risk of negative equity. It’s one thing for the OO, its another for the IP. Negative equity is the stuff that keeps people awake at night. It starts with a trickle….

    • adelaide_economistMEMBER

      Unless they are double income earners in super-safe jobs (probably medical related) who had a huge deposit, if they have a mortgage that big I wouldn’t think they are that big on the concept of thinking about risk of any sort. They’ll be waiting each day for the daily Pravda Australia-edition to tell them what to think. “No worries, Shane Oliver says 5% and an absolute worst case of 20%”.

    • The psychology is as follows:
      – Safe as houses!
      – Gubmint has my back.
      Property doubles every 7yrs – the nice man who sold me this overpriced dump assured me this is the case.

      All clear?

      In all seriousness: most of the members on this blog are not in a precarious situation because we are either risk-averse, thoughtful people, while those in hock to their eye-balls are different personalities i.e. reckless or hopelessly naïve. There are heaps of people who, right now, don’t grasp the gravity of the Covid-19 situation. Not even close.

  14. DistortionMEMBER

    Partner works for a lender, as we’re both WFH at the moment I can hear her side of calls.

    She hasn’t been off the phone in the past week talking to people who have no means to pay and are loaded to the hilt with debts outside of the mortgage.

    Banks and Lenders doing hardship isn’t going to do much to plug the holes in this leaky boat.

    I’m no longer sceptic of MN’s scenarios playing out

    • adelaide_economistMEMBER

      Yes. We’re already hearing “well, people just won’t sell”. That’s fine if you can HODL but prices are set at the margin (on the way up *and* down) and it won’t take more than a handful of difficult cases in each suburb to start pushing those prices downwards. Yes the government will do things to stabilise it (and already has and is and will do more) but it doesn’t mean they can stop it completely. I don’t want 50% drops either, certainly not quickly, as it will destroy everything. But what I want, or millions of others, is probably as irrelevant as it always has been.

  15. v.mourad91MEMBER

    But if banks have put all mortgage repayments on ‘holiday’ then people cant default which means people cant be forced to sell which means house prices will stay stable until we ride this out!
    We’re all playing a rigged game!
    Anyone pick apart my point?