CBA: Aussie property prices to plunge 10% over next 6 months

By Gareth Aird, senior economist at CBA:

Key Points

  • COVID-19 will have a material negative impact on Australian residential property prices.
  • Momentum in the property market has plunged and new lending, turnover and prices are all forecast to fall over the next six months.
  • We expect Sydney and Melbourne property prices to underperform against the national benchmark.

Overview

Australian capital city dwelling prices, led by Sydney and Melbourne, have risen strongly over the past nine months (chart 1). But we expect that stellar run to end abruptly. The policy response to limit the spread of COVID-19 has created a plunge in economic activity and unemployment will spike. This will have profound short term consequences for the housing market. As a result, we have materially downwardly revised our expectations for Australian residential property prices.

It is our view that prices will fall sharply over the next six months. New lending is expected to contract, buyer expectations have adjusted downwards from exuberance to pessimism, rents are likely to fall, auction clearance rates are expected to remain weak and turnover will be lower than usual. In addition, the usual underlying demand pulse from net overseas migration has evaporated because the border is shut. The net result means that price declines are inevitable. The extent to which prices fall will largely be determined by the magnitude of the lift in unemployment and the length of time that the government-imposed restrictions on day-to-day activity remain in play.

The forces are not all one way, however. Aggressive monetary policy easing has resulted in record low variable and fixed mortgage rates, which acts as a support to dwelling prices (chart 3). And debt relief via deferred home loan repayments for impacted households will mean less distressed sales arising from job losses than would otherwise be the case.

This note outlines our views on dwelling prices, our underpinning assumptions and the risks to our forecasts. Our quantitative assessment of the residential market, overlaid with our qualitative views, means that we now expect national property prices to fall by around 10% over the next six months (i.e. 20% annualised). We would caution, however, that there is a great deal of uncertainty at present and there are scenarios where prices could fall by both more or less than we expect.

Within the mix there is likely to be variation in outcomes by capital city. More specifically, we expect Sydney and Melbourne to underperform relative to the national average. The NSW and Victorian economies have more exposure to the most heavily impacted services sectors and less exposure to some of the more insulated sectors (i.e. mining and agriculture). In addition, the Sydney and Melbourne housing markets are more reliant on strong population growth, particularly by immigration, to underpin demand.

Recent story

National dwelling prices have risen strongly since mid-2020. Dwelling prices were 8.9% higher over the year to March. Price rises have been greatest in Sydney (13.0%/yr) and Melbourne (12.0%/yr). The reasons behind the surge in prices have been well documented: RBA interest rate cuts, coupled with extra borrowing capacity from the APRA induced changes to loan serviceability assessment and a surprise election outcome that removed some taxation risks around housing.

All of these factors still remain in play. But the bigger issue of COVID-19 and its impact on the Australian economy supersedes them. At this stage the daily CoreLogic residential price data, which is the industry benchmark, has not turned downwards. But other timely indicators of the property market have moved sharply lower. We expect the CoreLogic daily dwelling price data to turn down very soon.

Why will prices fall?

In summary, there are five reasons why dwelling prices will fall:

(i) Unemployment is rising very quickly. The government enforced shutdown has led to mass job losses. The ABS official figures are dated and do not capture the big lift in unemployment that has occurred since mid-March. Our internal data on unemployment benefits (i.e. JobSeeker) paid to CBA accounts shows that there has been a surge in the number people receiving JobSeeker payments (chart 4). This will continue to rise given the lag between applying for JobSeeker and receiving payments. We expect the unemployment rate to peak at ~8%.

It is not always the case that rising unemployment leads to falling house prices. And in some instances the housing market tends to lead the labour market rather than the other way around. However, a shock to the labour market of this magnitude will put significant downward pressure on dwelling prices. By way of comparison, during the 1990s recession the unemployment rate peaked at 11%. Dwelling prices fell by 6.2% over a 20 month period. But inflation was a lot higher over that period than it is today. In real terms, i.e. adjusting for inflation, house prices fell by ~15% over a 20 month period (chart 5).

The profile for the unemployment rate is expected to be quite different this time around. It will rise very quickly, but should start falling over the second half of 2020 (chart 6). The sudden spike in unemployment will mean the impact on the property market is immediate but should not be as long lasting.

(ii) The household perception around prices has shifted dramatically. According to the AprilWBC/Melbourne Institute Consumer Sentiment report, the proportion of households expecting dwelling prices to rise over the next twelve months has plunged to its lowest level since the question was first asked in late 2009(chart 7). This index has historically had a very strong leading relationship with dwelling prices. If households as a collective expect prices to fall then they will.

(iii) The rise in unemployment will put downward pressure on rents. Falling rents generally mean falling prices. In addition, there is significant uncertainty right now over the contractual obligations between a tenant and their landlord because policy changes are occurring at the state level. In NSW, for example, the government has introduced an interim 60-day stop on landlords seeking to evict tenants due to rental arrears as a result of COVID-19, together with longer six month restrictions on rental arrears evictions for those financially disadvantaged by COVID-19. To be clear, we are not questioning such policy changes. But rather we are highlighting how short term intervention in the housing market that changes the existing governance and contractual obligation between landlords and tenants will act as a major deterrent over the next six months from would-be investors.

(iv) Foreign investment in Australian property is likely to drop to close to zero during the enforced shutdown. To be fair, the foreign investor share of property purchases has fallen over the past few years. But there has still been foreign buyers which adds to aggregate demand for housing and supports dwelling prices.

(v) Net overseas immigration has effectively dropped to zero because the border is shut. We would envisage that the border is only reopened once all of the restrictions on the domestic economy have been lifted. That looks to be some distance away. There are implications for the housing market because Australia’s population growth has been very strong over the recent past because of the high migrant intake each year (chart 8).

Everybody needs a roof over their head and the strong level of net overseas migration has added significantly to the demand for housing. Indeed strong population growth has also kept vacancy rates in most capital cities anchored despite the boom in apartment construction across Australia. The rapid halt to net overseas migration is a material negative demand shock to the Australian property market. It will have an impact on both prices and residential construction.

How far will prices fall?

Forecasting is a tricky art at the best of times and right now it is incredibly challenging. Indeed predicting property prices can look foolish retrospectively and right now it is verging on the impossible given all of the dynamics at play. Nonetheless, we have input the latest leading indicators of the property market into our model as a starting point and the results tell their own story (chart 9).

The model puts the annual change in national dwelling prices as a function of the annual change in mortgage rates (1 year advanced), the annual change in the flow of credit (six months advanced), auction clearance rates (four months advanced) and the house price expectations index from the WBC/MI Consumer Sentiment survey (2 months advanced). The collapse in auction clearance rates and house price expectations has led to the model estimate of home prices plunging.

When we overlay the model driven results with a qualitative assessment of the housing market based on our assumptions1for the economy (GDP -7.5%/qtr Q2 20, unemployment rate to rise to ~8%) we have a central scenario that national dwelling prices contract by 10% over the next six months (i.e. average monthly falls of ~1¾%and an annualised pace of 20%). We would then expect prices to stabilise before gradually rising as the unemployment rate begins to decline and restrictions on activity, including the housing market, are eased. It is possible that prices rise briskly in 2021as was the case from mid-2019 given the incredibly low interest rates.

Table 1 details our point forecasts by capital city. We expect both Sydney and Melbourne to underperform relative to the national benchmark. Both NSW and Victoria have more exposure to the most heavily impacted services sectors and less exposure to the more insulated sectors (i.e. agriculture and mining).Indeed our latest internal data shows that the biggest annual declines in CBA credit and debit card spending are in Victoria and NSW (chart 10). In addition, the Sydney and Melbourne housing markets are more impacted by the abrupt temporary halt to net overseas migration as well as the expected fall in foreign demand.

Risks

There are both downside and upside risks to our dwelling price forecasts. The risks both hinge on the length of the enforced shutdown and restrictions placed on economic activity.

In a best case scenario government restrictions on economic activity could start to be lifted by the end of May. For that to occur, it would probably take several days of zero or very low community transmission of new COVID-19 cases. That is a possible scenario given the current trend in new COVID-19 cases (chart 11).

If that were to occur the plunge in economic activity that we expect would not be as large and the impact on the property market would not be as severe. Indeed the fall in property prices would be significantly smaller than our central scenario, particularly given the extraordinary low borrowing rates currently on offer.

There are scenarios, however, that are significantly worse than our central scenario. If restrictions are eased in Q3 20, as we expect, but a second round of COVID-19 new cases emerge then both the economy and housing market would be adversely impacted again. We would see restrictions return but the hit this time around on the economy and labour markets would be more significant and the damage would be longer lasting. Falls in dwelling prices far greater than our central scenario would be plausible. We believe that policymakers will be acutely aware of the risk of this scenario and as a result they will take a cautious approach to reopening the economy.

Housing commencements

Residential construction will also be impacted by COVID-19. The combination of rising unemployment, falling dwelling prices and a halt to net overseas migration will see dwelling commencements slow significantly in 2020 (chart 12). Our new forecasts for dwelling commencements in 2020 are tabled below:

 

Comments

    • Does it matter?
      If they say its going to be worse, then people Like Peachy will say they are delusional, if they dont then others will say they are delusional.

      My take is I cant see how it wont be a lot worse, But I have been shaking my head for years trying to work out why people keep buying property at such stupid prices, the market fundamentals dont add up, the demographics dont make sense but people keep buying in. But they keep on doing it..

      the situation now is a lot different to anything we have ever seen, even the great depression was different. I dont think anyone can predict what will happen with any certainty but I think that is what makes it so much more dangerous.

      • Totally agree Kanniget
        There is some seriously strange psychology going on here, not sure if the reason people keep buying at these stupid unsustainable prices is due to FOMO, keeping up with the joneses, or some other freudian thing. All I do know is that ego and arrogance plays a big part.

      • “……for years trying to work out why people keep buying property at such stupid prices”

        It’s our religion………

      • Goldstandard1MEMBER

        Well people payed crazy prices because of two reasons:
        -The belief that the debt game (borrow as much as you can) will continue forever
        -There is no default risk if people can service loans – ie. so long as people have jobs the loans and thus property prices are all justified.

        These reasons are over. Thus the bubble is bursting.

        • Jumping jack flash

          Can only hope, but there are over 2 trillion reasons why prices won’t be allowed to fall by too much.

        • Third perhaps:
          – the sheeple regarded property as being much less volatile compared to shares, with little or no risk of it falling in value ever.

  1. david collyerMEMBER

    Gareth lays out the paradigm OK. How he arrived at -10% is not at all clear, particularly when there are so many unknowns that may or may not compound. Statistically sufficient price discovery must wait until the property market reopens after the lock-down. We all will have had plenty of time to reconsider our balance sheets and asset allocation. Anyone pretending to know risk appetite or desired debt levels is either a liar or a fool.

    • TailorTrashMEMBER

      How he arrived at -10% ? Every time a bank person talks about a drop in house prices it’s always never more than 10-20% …..and that’s probably the equity held by the punters ……..so if we can manage expectations and keep calm and carry on to do a little let down of prices then who cares about the punters equity ….as long as the banks risky loans are still embedded in those houses or at worst recoverable on a sale ……..

      • david collyerMEMBER

        Mr Tezza, I recently changed my sentiment.

        Get Ready to Buy!

        But wait for the blood in the streets – 18 months(tm) to three years.

  2. “ we now expect national property prices to fall by around 10% over the next six months (i.e. 20% annualised).”

    … his surname isn’t spelled AIRD, he put in an I and forgot the T at the start!

  3. truthisfashionable

    10% is woeful. I wouldn’t even buy the coffee machine I was looking at for only a 10% discount. Many people negotiate more than 10% off the price of a brand new car.

    Watching those USA based renovator shows (who doesn’t love Chip & Joanna Gaines – what a surname for a couple of renovators) often they get more than 10% off the listed price.

    But for Australia, a 10% downwards price indication is breaking news. Perhaps i’m just bitter I was never indoctrinated into the church of propertology.

    • “Statistically sufficient price discovery must wait until the property market reopens after the lock-down.”
      I suspect the property market will follow the equity markets in their delusional belief that “they’ve been saved!’ by forced intervention.
      Take our ‘bankrupt’ national airline; Air New Zealand. It pays no dividend; has reduced it’s a flight to virtually zero; has indicated that it will be a fraction of its size in the future; the Government ie; us, have tipped in nearly a billion dollars to get it through, and yet today its shares are virtually unchanged to what they were before Covid19 hit!
      I ask you. Does any of this make sense? ( rhetorical question, of course!)

      • Winston Peters was interviewed this morning on the ABC and he didn’t rule out Air New Zealand replacing Virgin Australia here in Oz.

    • Jumping jack flash

      agree completely. 10% is not much to squawk about.
      If nobody is borrowing at 95% LVR either then it doesn’t really matter. The prices only have to rise enough to paper over those cracks.

    • If 10% is the drop across the board, then some properties will drop substantially more (& others will maintain their value, or even increase due to local factors).

      It suggests some very significant discounting ahead.

    • In all seriousness most of the houses on 9LIFE/HGTV House Hunters etc are beautiful. Really shows how ripped off we get for quality and value for money. Chip and Joannas renovations are gorgeous – like multimillion dollar homes here – yet for pleb prices… Go figure?

  4. “ At this stage the daily CoreLogic residential price data, which is the industry benchmark, has not turned downwards”

    I’d like to see some more analysis about why it is the ‘industry benchmark’ and if it is whether that is justified in continuing. We know their data set has declined in quality significantly when they lost access to their major source a few months ago.

  5. Some banks are offering as low as 2.6% for investors who can afford P&I. Let’s assume council rates, insurance, repairs, agent fees, etc. add up to 2.4%. Therefore, if the (reduced) rent is at least 5% of the value of the loan, you would still be breaking even. I guess the problem is that (a) some investors can’t afford P&I, and (b) prices, particularly in Sydney and Melbourne, have exceeded 25x annual rent.

  6. The only way prices wont fall is if the governments job seeker payments, combined with the “request” for landlords, tenants and banks to sort things out actually means people do not need to sell their home, that they can survive without renting out their IP’s.

    A cursory glance at the housing market shows that listings in both sectors have risen by 10% in the past fortnight based on TOTAL listings on domain.

    In a market with zero, and contracting – buyers, and renters, with exploding listings there is only one result.

    A price crash of 10% in the biggest bubble in any market in all of history – as it enters the biggest financial crash in all of recorded history – is so monumentally delusional there are just no words to describe how completely and utterly out of touch it is.

    Just think about those two events – largest bubble in recorded human history meets largest financial crash in recorded human history.

    Prices down 70%.

    • Sounds about the percentage my house in Ireland went down in 2008….still down 50% 12 years later…

    • Jumping jack flash

      70% is what it needs to be, maybe even more. The fact that debt is now required to purchase property is a travesty and testament to how crazy it has got. 50 years ago debt wasn’t required at all, and it was very hard to get any significant amount of debt to use for property purchases. Now it is completely essential, and for no good reason except for greed, and the gargantuan debt load has decimated the global economy.

    • Yer nah prices just retrace the recent crash then stagnant for 5 years. We need a new game

  7. Goldstandard1MEMBER

    So I would say we are through 10% already.
    I actually like the analysis, just the conclusion of 10% is crazy bullish. You can bake in 30% and maybe keep going.

    20% unemployment (including job-ghoster program) + bank will tighten lending + cratering confidence+ no immigration + people not spending = not 10%.

    This is a huge macro shock that is global, and has no end in sight health wise or economically. Not only that, even if they have a cure in a month, the tsunami from the earthquake has not even hit land yet

  8. Even a 20% clip off prices is far higher than I would like to have been buying at if holding off for the big crash. It would drop the place I bought at 940 down to around say 750k. But I would have saved nothing on stamp duty (or nothing worth writing about).

    If Australia gets new cases down to 0 and slowly re-opens the economy things materially improve from there.

    The big problem is and I suspect that’s why stocks have rebounded is that 0% interest rates gives you nowhere else to park your money for a return. So assets are given value because money has none. Or at least holding it has no value. So what do you do with it? Buy bonds at 1%? Woopee.

    At least if you pay off your PPOR you’ll eventually be rent free. That’s the goal for me anyway.

  9. All advisors and businesses I have had fortune of speaking to becoming increasingly frustrated (pissed off) with CBA during this process. Clear that they have an internal policy (if unwritten) to deny as much funding (even govt backed) as possible drag out providng finance as far as possible.

  10. prices already fell by 10% and probably even more
    half the houses that were advertised for sale in early March were taken off the market and asking price for the other half is at least 10% down by now – many by 15%

    In 2018 prices in Sydney fell 15% while unemployment in NSW fell from 5.2% in Jan 18 to 4.4 in Nov 18

    and now with unemployment going to 15% prices will fell only 10%
    total BS

    • +1 just because interest rates are low doesn’t mean property will grow and grow. Why did prices start falling in 2019 before the cuts!

  11. gballardMEMBER

    Property prices are already falling. Is the CBA economist trumpeting some blinding new revelation? Answer. NO!!! Only 10% – he is being conservative.

  12. Norman Mulgrew

    Anecdata : Houses Ive been watching in sunshine coast , only put on sale last week at 720k, have already been reduced to 695k …still overpriced but panic is out there!