Australia’s property market collapses

Australia’s property market is in the early stages of collapse according to the Guardian Australia, which is reporting a “devastating impact” on both sales volumes and rents from the COVID-19 shutdown:

Sales values have dropped 85% in Melbourne in the past eight weeks, according to figures released on Tuesday, equating to a loss of $584m compared with the same period last year. In Sydney, sales were down 79% (a loss of $454m)…

Across all capital cities rental asking prices fell 3.1% in the past week and 2.5% in the past month… But they mask huge falls in the plusher areas such as Sydney’s eastern suburbs, where house rents are down 10%, and the CBD, where they are off by 17%.

The president of the Property Owners Association of NSW, John Gilmovich, said the rental market was “very challenging” in Sydney’s inner suburbs.

“In a nutshell, 10% of the rental book is vacant,” he said. “Some tenants have just bailed out. They’ve broken their leases and handed back the keys saying they just can’t pay. Others have seen their leases expire and not renewed. The under-40s especially are moving back to live with mum and dad.”

He confirmed rents had dropped at least 10%, and in some areas as much as 15%, leading to a price war between landlords desperate to fill their properties…

Louis Christopher of SQM research said it was “pretty evident” that there was a recession in the housing rental market and one of the main causes was a fall in net migration thanks to the coronavirus lockdown…

Christopher said: “The bulk of population growth is from overseas migration and that has effectively been frozen. It’s come to a screeching halt.”

How the fall in sales volumes and rents translates into dwelling prices is anyone’s guess. But the risks for prices are on the downside given:

  • The anticipated strong lift in unemployment alongside falling household disposable income;
  • The anticipated closure of many small to medium-sized enterprises;
  • Heavy falls in net overseas migration; and
  • Potentially tightening credit availability as banks become more conservative about people’s employment/income prospects.

A lot will depend on how long the COVID-19 lockdown persists and whether Australia experiences a secondary wave of infections causing further shutdowns.

Being an illiquid consumption good means that housing values are tied heavily to the fundamentals of employment and income. The worse these are impacted, the worse housing values will be as well.

A genuine property crash could arise if there are widespread business closures, creating mass unemployment for an extended period. This would likely generate large numbers of forced sales and failed settlements, resulting in a potential 20% t0 30% ‘crash’ in Australian dwelling values.

I sincerely hope that we do not arrive at this point because it would likely drive Australia into a deep depression, given how reliant the economy has become on housing and how Australians have their life’s savings tied up in their homes.

The next few months will tell the tail.

Unconventional Economist
Latest posts by Unconventional Economist (see all)

Comments

    • Maybe today but Melbournes been falling since first week of April and looks like Sydney peaked roughly a week ago.

  1. Sales values have dropped 85% in Melbourne in the past eight weeks, according to figures released on Tuesday,

    Would this be volumes? Or values?

  2. Guardian are not credible on this subject. Leading sentence is sensational referring out of context to “values” and “losses”

    Sales values have dropped 85% in Melbourne in the past eight weeks, according to figures released on Tuesday, equating to a loss of $584m compared with the same period last year. In Sydney, sales were down 79% (a loss of $454m)…

    • They’re not credible because they’re pro-immigration and because they think falling property is a bad thing.

      • Maybe, but I suspect the person covering that RE story isn’t that sharp at understanding data rather than it being a deliberate cover up. That is not surprising as these days reporting jobs can be handed to anyone who is free (at least for the less specialised topics) – Hell, I have seen science stories hashed badly by sports journalists as they had to cover the story at short notice and were hopelessly out of their depth (and visa versa too). This is not to say Journo’s are uneducated fools – it’s more that they are stronger on some topics than others. That said, some are certainly smarter (or dumber) than their colleagues. Luck of the draw really.

        • Same as any other profession really. Most people, whatever the profession, are average at best.

  3. It is a very interesting situation. None of these over priced economics writers seem willing to talk about the feedback loops.
    The Bank of Mum and Dad is the 5th largest lender in Australia. This entity has no REPO facility at RBA to speak of. Also no mention of cross collateralisation of assets.
    Yesterday REA ran a story about a punter who had amassed $12m in property. Music teacher he was, who woke up one day after the 2000 Olympics and decided to be a walking hedge fund. This punter is leveraged 55%. I would think he will be leveraged 80% soon. He will consult his spreadsheet and assure himself the gearing is fineoverall, but some properties will be way over leveraged. He will try and sell the good ones to relieve pressure on the trash. It wont work and his life will begin moving in a downward motion.
    The banks will wind him up, his pretty wife will walk, take the kids and he will blow his brains out.

    • Flipping that. If you want to leave you stop paying rent. When asked why, tell them the real estate agent put you in a position where you had lost all bargaining power by not releasing you from the contract.

    • “Some tenants have just bailed out. They’ve broken their leases….”
      What are the landlords’ going to do? Round up the fleeing and herd them back into their rentals?
      I shudder to think what the places will look like after any period of enforced enforcement. Trashed, would be my best suggestion.

    • That is absolutely insane indeed !!!! How can they take away the right to leave for renters without a fixed term? That’s illegal on all fronts; Vic Gov and landlords are in bed together and panicking about a rental market crash ….

      • Realistically if you just assert hardship and the desire to leave it’s hard to imagine them really taking you to VCAT. it means several months delay during which they are not getting rent or a new tenant. They will mostly just let you go and start the new search for a tenant (at a much lower price).

    • Yeah I posted that yesterday. How disgraceful is that. So if I want to move suburbs or move to a better house I am not allowed.

      • I saw your post yesterday on this and have been trying to find other links on this. It’s an interesting development (and strange too) – if I read that correctly it seems a tenant can leave their current rental upon expiry of a fixed term lease, but not if they are on a month to month agreement.

        As people have mentioned, there are plenty of good reasons a tenant may want to move that don’t fit the ‘hardship’ critera (another grey legal weasel word like ‘reasonable’ and ‘attempt’) – just WTAF does ‘hardship’ imply?

        Are these tenants effectively under house arrest now?
        Why doesn’t it also apply to people who sell their homes?
        Or even fixed term renters?

        It seems very odd. I am curious and want to know more.

        • ignoratio elenchiMEMBER

          I saw this link yesterday. The channel 7 news article does not accurately portray the changes to the act. If you are month to month the normal notice period (i.e. 28 days) applies unless you are in distress in which case the notice period is reduced to 14 days.

          • Thank you. That makes a lot more sense. I alway try to verify stories that I find on the more ‘click baity’ sites like yahoo and the daily wail.

        • Bertrand Russell

          I twitter raged about this yesterday – two things are most prominent. Firstly it directly contravenes Victorias Charter of Human Rights which is backed by law and can be challenged in the Supreme Court – the right to “CHOOSE WHERE YOU LIVE”. Section 12.

          The second issue was that 30% of or more of your salary as rent is considered extreme hardship in rental terms – who knew – so basically everyone could challenge their rent on the basis of global average rental rates to income ratios.

          I got some traction – they have acknowledged they stuffed it, talked about recalling parliament – then said nah – we meant it and have doubled down.

          Someone needs to challenge it in court. Not VCAT – under breach of Human Rights.

          • RogueChefMEMBER

            Agreed. However, the problem is that state courts don’t have the power to strike down legislation. Govt gave Parliament a couple of exits for when they introduce controversial legislation. In this case, assuming the supreme court finds the laws incompatible with the charter to begin with, all they can do is issue a declaration of incompatible interpretation. The declaration just requires the minister who proposed the law to have another look at it. With parliament suspended plus the lack of political will to amend the law, best assume the law will stay as is. It’s weak framework, but with nothing constitutionally available federally, it’s probably better than nothing. And the framers probably didn’t have a pandemic in mind when contemplating how the legislation would actually work…

          • I think it’s because of the same reason they gave to Landlords.. there’s a frggn Virus going around.
            Seriously, DO you want people suddenly moving around en masse?
            The virus will go nuts. I think the govt just considers this an extension of restricting movement.
            Though, I don’t see why should then restrict people from moving back home with their parents. It’s not like they are moving around, in the sense, they will form a household with someone else.
            Plus share houses are fkd. Generally not all are on the lease.. anyone not on lease can p1ss off and then it’s not hard to prove the mug remaining has financial difficulty.

          • I read that, and the actual ammended act itself, and honestly I still couldn’t make heads or tails of it. Everyone’s reporting that it applies specifically to people on periodic tenancies, but that’s not what I see – it seems to actually apply to all tenancies, regardless of term.. which is odd? If I give notice on a month to month, aren’t I saying i dont want to renew a contract? How is the government legislating that i have to renew a contract that’s no longer appropriate?

            What is completely missing is any justification of why they’re doing this?

            If I’ve lost my job, but find another on the other side of town that requires moving.. i cant because… why? The relative ease of moving for work is why some of us rent in the first place!

            It will at least automatically repeal in 6 months. Unless they renew it I guess?

    • “I’m on a month-to-month and can’t pay my rent. I want to leave. Oh you say I can’t leave. Ok, I’ll stay for free until we can get a VCAT date.”

      • Bertrand Russell

        Financial hardship is allowed.

        Just not allowed to get a better deal – pretty sure agents were allowed to take renters bidding up prices.

    • Mr SquiggleMEMBER

      This lockdown is now becoming sinister. A ban on moving to new lease is remiscent of nazi regimes.A new rental arrangement would not stop me self isolating. How does this change protect the healthcare system. What if I wanted to make my first home purchase and break my lease to move into a new home?

  4. Display NameMEMBER

    I assume the hedonic index, the most advanced daily property index, is still marching inexorably upwards.

    • Melbourne has been falling since 6 April on CoreLogic. Sydney seems to be stuck at current level for last ten days.

  5. Property crash of 20-30% is still way to expensive in my opinion. 1.5 mill home down to 1 mill ish. That’s not a crash.

        • It also is if you bought years ago and used the “equity” to do a reno, buy a RTW trip or European sports car/ SUV.

        • This is why once it drops it will be hard to stop. In the US during the GFC falls of 70% were common in the hardest hit locations. We are talking tier 1 and 2 cities in the US too. Places that are desirable to live.

          The price would drop and hardly anyone would make an offer as they knew it would be cheaper the following week, which it was as prices need to fall to get any offers at all. Once this sort of feedback loop happens it can drop a long way before the brakes come on.

          If it falls 30%, I would put down good money it can fall 60%-70% – why not? Nobody wants to catch a falling knife.

          • People have become so adjusted to this “new normal” that they don’t think it could possibly fall much. But the reality is, once the falls happen, that will become the “new normal” and after awhile people won’t be able to imagine the previous astronomical prices.

    • Jumping jack flash

      Agree completely T-Bag.

      Nowhere near a crash.
      Don’t forget that the idea that an ordinary worker, a “Quiet Australian”, an average rube, can and must take on a mind-bogglingly huge stack of debt to purchase the property with is an anomaly and an aberration in itself.

      House prices need to fall to the level where debt is not required at all – i.e, a house can be paid for in full with cash after an adequate period of saving a reasonable amount of income after cost of living expenses.

      And in this environment of extreme debt that means that costs of living are gouged for as much as possible in order to service and obtain the debt – debt that was and continues to be absolutely necessary, and in this environment where literal slaves are introduced into the workforce to steal wages from to boost the incomes of the business owners to obtain and maintain that necessary and vital debt and remain competitive, that price is very, very, low indeed.

      • So back to approximately 2010 prices then? Or what year? How long has the most recent doubling taken?

    • Yeah I think though, 20 – 30% in “official stats” downturn is more like 40 – 60% in lived in experience. I found that about the last downturn.. the official fudged up numbers didnt tell the whole story…
      FYI bcnich had said 50 down at some point.
      Here’s the timeline I’m tracking:

      1. 4 Dec 2019
      https://www.macrobusiness.com.au/2019/12/lunatic-rba-launches-australian-dollar-into-global-trade-shock/
      “I think the 20/30% fall in Aussie property may happen in H1 next year
      Credit to freeze up causing home loan interest rates to rise”

      2. Feb 17 2020 – the cheapy bcnich wager
      https://www.macrobusiness.com.au/2020/02/how-high-can-the-house-price-boom-go/

      3. 3 March 2020
      https://www.macrobusiness.com.au/2020/03/fake-prices-of-property-bubble-to-implode/
      “We are only months away (April) from the Aust Banks needing.a bail out, houses prices in Australia will be down 30 to 50% this time next year”

      MB still calling a surge at this point –> https://www.macrobusiness.com.au/2020/03/super-saturday-delivers-strong-final-auction-results/

      4. 4 March 2020 – something about the switch
      https://www.macrobusiness.com.au/2020/03/australian-dollar-blasts-off-as-fed-rogers-rba/
      “Once people wake up to THE SWITCH property prices will start falling i would say May, property will just follow sharemarket down with a 90 day lag”

      So May is not far away..

  6. TailorTrashMEMBER

    “I sincerely hope that we do not arrive at this point because it would likely drive Australia into a deep depression, given how reliant the economy has become on housing and how Australians have their life’s savings tied up in their homes.”

    Much prefer David’s philosophy……….Let it fcuking burn ……..

    • Hehehe yeah I interpret LVO like a mafia don

      “It would be a pity if anything happened to your wife and kids. I sincerely hope we don’t arrive at that point”.

      • Now i get it….for the last few days i thought he has become a mainstream economist who worship housing economy….lol

        • I suspect the knows enough about human behaviour and markets to know if it does fail (as it likely will) there will be a world of pain, blame and recriminations.

          He understands how folks turn on short sellers when the sharemarket drops, blaming them for causing the crisis rather than understanding they are smart enough to profit from it (also – it is often seen as distasteful to profit from other people’s losses – I find that weird as trading is a zero sum game and there are ‘losers’ in a rising market too, reversed perhaps, but losers none the less, but few folks see it that way).

          Anyway, I assume he is smart enough to avoid being an obvious scapegoat when the SHTF later this year.

          • Ian ArunMEMBER

            Smart thinking, seen this happen in corporate world; none wants to be bearer of bad news.

  7. Saw this today on fb… If lending is really this tight it will surely put the squeeze on things

    “Hubbie & I have just been rejected for our first home loan with a $100k deposit. House was $520k. We have never been in debt, have a credit card of $2k always paid in full at the end of the month & work in essential services. We used a highly recommended mortgage broker. We have a hecs debt of $20k, that’s holding us back. Has anyone else had hecs debt burden?I’m struggling to understand how first home owners do it.”

    • Wow interesting. Thanks.

      Tell em to get a 20% deposit, they are currently well short once they account for their hecs debt and possibly stamp duty.
      Basically they have $80K, wait 6 months and that $520K house will probably be $400K, no worries!

      Also are they trying to buy an apartment in a blacklisted suburb? That will make it harder still.

    • If prices drop 30% they would be in negative equity by around $80k… this is probably the lenders benchmark

    • Why still have that $2k in credit card debt? You’ve established a good credit history – now clear it!

      Should have also knocked over the HECS too.

      • Yeah, reduce that to $500 or kill it entirely. They should use part of the house deposit to knock off the HEC debt, or at least lower it. Agree on the suburbs / type of dwelling. There are places and locations that the bank won’t lend regardless of your financial position.

      • Credit Card debt probably refers to the card limit. So they need to cancel their cards rather than pay them off.

          • Yes, it helps. Not having a history of repaying debt is a hinderance to the loan process – the lenders are more comfy if you have a history of managing debt rather than paying everything upfront. Odd, but that’s how it is.

            The downside is any credit limit is considered to be ‘maxed out’ by the loan provider, even if nothing is owing on it. If you have a $25,000 limit on your credit card (insane I know, but people have them) with a zero balance, the bank will consider that as a $25,000 debt and adjust the loan valuation accordingly.

            If you are applying for a mortgage, you are best of dropping the limit to $500 or closing it entirely. You can alway put it back up again once the loan is approved. It is all part of the dance.

    • How much do they earn together? Banks would want at least $70k household.
      DUring recession they would want $105k

  8. Elwood VIC 3184. Has gone from 105 rentals on the market mid March to 161 today.
    Over 50% increase in just over a month. Rents asking price in some
    cases down 10-15%+.

    • Periodically done a Real Ass.com.au search for Melbourne City Greater Region with no other filters, this basically includes the CBD & adjacent suburbs. 15/4/2020 – 5,822 Rentals, 2,037 Sales. 30/4/2020 – 7,138 Rentals, 2,023 Sales. Look out below!

  9. I sincerely hope that we do arrive at this point because it would likely drive Australia into a deep depression, forcing us to into structural reform of our unproductive and inequitable economy. It would also force us to allocate resources to support productive labour instead of giving an endless free lunch to decrepit old capital.

    • It is the only avenue to economic / social success. Some retribution and some reflection but lots of natural (god given) justice.

    • It seems like we need to be in a better productive position (making and exporting stuff the world needs) because these ‘who could have predicted’ external shocks are becoming more common.

      We need to rethink how we look down on manufacturing and food production.

      Being an impoverished service economy isn’t sehxy either.

  10. its too soon to tell the possible impact.
    “…. housing values are tied heavily to the fundamentals of employment and income.”
    Housing values are also very closely negatively correlated to interest rates and so with rates at and going to zero if things turn really bad where will the pressure to force sell come from??

  11. “I sincerely hope that we do not arrive at this point because it would likely drive Australia into a deep depression, given how reliant the economy has become on housing and how Australians have their life’s savings tied up in their homes.”

    But what would the alternative look like? Somehow they manage to get the housing boom going again? Or somehow it all just plateaus and Aussies never decide to go nuts about property again? I’m not seeing credible alternatives at this point. We can wish for some magic ending as much as we want, but does it match any possible real world outcome?

    Of course, most of us realised there was really only one endgame once the government decided to go “all-in” on property. It’s the same thing that happens to every gambler who sits at the table for too long.

    • As a society are we able to change our views on housing? A radical paradigm shift?

      Houses are for living in. There’s other investment options. Renting isn’t demonised. You get a mortgage if you can really afford it (covered for shocks, rate increases and loss of work). We aim for quality builds – people shouldn’t accept noisy cramped falling apart units. We don’t pay a huge proportion of income towards a mortgage. A house shouldn’t be an ATM. The aging shouldn’t be pushing for high prices and expect that their artificially rising asset/ATM not to be pension asset tested.

      • The only way we can get there is for Aussie’s to change their opinions on housing. The only way for that to happen is for them to actually believe that it was all just a giant bubble and not “easy money”. The only way for that to happen is for the bubble to pop. 20 million people aren’t going to suddenly decide it’s not a good idea to invest in housing, on a dime, without a housing crash.

        You can’t just tell Aussies that there is no “property god” and expect them to all see the light, they actually have to have the property god crumble in front of them.

  12. We seriously need to structure a reliable future, not just unhelpfully scoff at the idiocy of the current one as it crumbles. The fact is that ANY land price (above value of improvements) is theft from Creation/Creator (what gave the land for free), first peoples, huddled masses and future generations. Sites must transfer for NIL. This can be enabled by ditching all taxes (which are artificial impacts that warp effort & initiative anyway) and collecting instead the annual rental-value of each cadastral site privately occupied. That value is the worth of the site-monopoly (exclusive possession) granted by the community, so really it is payment for a service rendered more than a tax. The site revenue must be ascertained by trained valuers studying prices paid on site transfers, NEVER by politicians.

      • Pipe dream.

        Perhaps crux is an apt word. Because it would take another coming of Jesus fecking Christ to achieve this.

        We might actually need the whole trinity, the boy might not be enough.

  13. Teignmouth Electron

    Thinking about Government response to this, you need to consider Scummo & Co’s options (next Federal election is due 2022 so it will be their agenda for the coming crucial period), ordered from most desired to least:

    1. FIRE industry parasites (a.k.a. Coalition donors) making out like bandits
    2. FIRE takes a hit, but RE prices propped up
    3. RE hit, but employment propped up
    4. Employment hit, but social order maintained
    5. Social order breakdown, but politicians not directly threatened either fiscally or physically
    6. Politicians threatened, but have means to escape to safe exile
    7. Safe exile cut off, but option for painless death preserved
    8. Capture before painless death, but get fair trial and basic human rights during imprisonment
    9. Extra judicial punishment / painful death

    It’s strategy 101 – where do you make your stand and how much do you commit without ruling out the possibility of falling back a step in an orderly fashion?

    Now 1, 2 are off the table on any view, unless you are still drinking the CrapLogic/DomainFax koolaid.

    Right now, the question is taking a stand at 3 or 4. Notice that if there is a need to fall back to 5, the appeal of Australia as migration/study/tourism destination is trashed for at least 20 years. The steps are not equal. The most earth shattering paradigm shifts are 4 to 5 and 6 to 7. Other steps are trivial by comparison.

    Neither of 3 or 4 are compatible with continued mass migration of essentially non skilled workers (i.e. a poorly enforced skilled migration program), so that has to stop, very very publicly. As will the taxation free ride for the top 10%, which is not compatible with 4.

    That’s where we are heading.

    • Another pipe dream.

      If for no other reason that no government thinks about losing control until after they have lost control.