CBA: Aussie property prices to rebound in 2021

CBA’s head of Australian economics has revised down its forecast for peak-to-trough property price falls and now believes that values will rebound strongly in 2021:

Key Points

  • The COVID-19 pandemic has had a negative impact on Australian residential property prices, but outcomes vary significantly by capital city.
  • We expect dwelling prices to continue to decline at a modest pace and to trough in Q1 21.
  • But we expect a solid recovery in prices from H2 21 as the borrowing cost once again becomes the dominant influence on prices.
  • We expect Melbourne property prices to significantly underperform against the national benchmark.

Overview

In April 2020 we published updated dwelling price forecasts to reflect the impact of theCOVID-19 pandemic on the Australian property market. Our central scenario was that dwelling prices nationally would fall by around 10% from their April peak. It is now September so we think that it’s an opportune time to revisit our forecasts in the context of how the housing market has performed over the past six months and how our views on the economic outlook have evolved.

In doing so, two things immediately stand out to us:

(i) the fall in dwelling prices to date has been a lot smaller than we anticipated; and

(ii)the variation between capital cities has been a lot larger than we expected.

For the record, we had always expected Melbourne and Sydney 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 via net overseas migration to underpin demand. But what we didn’t know of course was that COVID-19 would have a much bigger impact on the Melbourne economy relative to the other capital cities.

Parking the Melbourne issues to one side, what has genuinely surprised us is the resilience of house prices in some of the other capital cities considering the negative shock to labour markets around the country.

We continue to expect prices to ease. But we are now looking for a national peak to trough fall of 6% versus our previous call of 10%. We now expect that trough to arrive in Q1 2021 (versus end 2020 previously). And we expect a much larger disparity between outcomes by capital city than initially forecast. For example, we have forecast a fall in Melbourne property prices of 12% from April 20 to Q1 2021, whilst prices are expected to increase modestly in Hobart and the ACT over that period.

Our forecast profile for dwelling prices has been extended to end-2021. Our central scenario is that dwelling prices plateau in Q2 21 before rising over H2 21. Our forecast is for solid price growth in H2 21 as the economic recovery gains traction and incredibly low interest rates once again become the dominant influence on dwelling prices. This note outlines our views on dwelling prices, our underpinning assumptions and the risks to our forecasts.

Recent story

According to Corelogic, national dwelling prices peaked in April and have trended lower ever since (charts 1 & 2). Between April and August (latest available) price falls have been largest in Melbourne (-4.3%) and Sydney (-2.6%) – it’s worth remembering that price rises were strongest in Melbourne and Sydney in the year leading up to the pandemic so the negative wealth effect on consumption is negligible at this stage. Prices have also declined in Perth (-2.2%) since April, but they are little changed in Brisbane (-0.9%) and Darwin (-0.7%) and have risen in Adelaide (+0.3%), Hobart (+1.0%) and the ACT (+1.8%).

In the context of an extraordinary negative economic shock the fall in national dwelling prices is modest. And whilst momentum in the Melbourne market is clearly negative, it is not particularly soft in Sydney and is holding up elsewhere. The reason for Melbourne’s underperformance is obvious – the stage 3 and stage 4 lockdowns from July. It is clear that had Melbourne not gone back into lockdown price falls would be more modest.

National prices are likely to continue to slide in the near term, primarily because of the situation in Melbourne. Unemployment has not yet peaked in Victoria and rising unemployment is a clear headwind for property prices (note that it is the direction in unemployment that matters most for property prices as opposed to the level of unemployment). In addition the household perception of the national market is consistent with a further softening in prices and the demand impulse from net overseas migration is non-existent. This is more acutely felt in Melbourne and Sydney.

How much further will prices fall?

As a starting point we have input the latest leading indicators of the property market into our model. The CBA dwelling price model has a good track record in predicting national near term price movements (chart 4).

Our 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 results are interesting because the inputs into the model are sending mixed signals.

House price expectations remains in the doldrums, but the national auction clearance rate is holding at a decent level (charts 5 and 6). The disparity is unusual. And whilst new lending is lower than its pre-COVID level, it has picked up in recent months (chart 7).

Our top down modelling points to prices falling by a modest ~0.6% a month over the remainder of 2020. Our bottom up approach by capital city suggests a similar outcome. We therefore expect national dwelling prices to be down by -1.8%/yr at December 2020 (implying a ~5.0% fall in prices from April 2020). We have pencilled in a further small fall in Q1 20 which takes the total peak to trough fall to ~6%. From there our central scenario is for a stabilisation in prices before a solid recovery fromH2 21 (+3% over six months or an annualised pace of ~6%).

Why prices could bounce sharply in H2 21 The RBA cuts to the cash rate in 2019 and 2020 that took mortgage rates to record lows are the main reason why dwelling prices nationally have not fallen all that much considering the huge negative shock to the economy. As the economy recovers and the headwinds of rising unemployment and falling rents  dissipate, we believe the borrowing cost will once again become the dominant driver of dwelling prices.

The RBA has tended to play down the influence of monetary policy decisions on dwelling prices. But we believe that changes in interest rates are the single most important driver of real property prices over the longer run.

The relationship between dwelling prices and monetary policy is quite straight forward: lower (higher) interest rates essentially means that for a given level of income a borrower can service a bigger (smaller) mortgage, all else equal. That means that lower (higher) interest rates put upward (downward) pressure on the demand for credit and therefore dwelling prices. We saw the profound impact that RBA rate cuts had on the property market as recently as last year. The housing market was reignited following three 25bp cuts to the cash rate in June, July and October2019and prices rose briskly until the pandemic arrived.

Importantly, lower interest rates don’t just have an impact on housing prices because households can borrow more for a given level of income. They also increase the attractiveness of property from an investment perspective because the yield on property is compared to the risk free rate (i.e. the term deposits rate for households–chart 8). It’s a similar story for equities, whereby lower interest rates push up equities prices, all else equal. Put another way, lower interest rates increase the demand for dwellings for both owner-occupiers and investors and they influence the price at which buyers and sellers will transact.

We have dived further into the relationship between interest rates and property priced and the evidence indicates that it is generally the percentage change in interest rates that has the greater impact on dwelling prices as opposed to the percentage point change in interest rates (chart 9). The distinction here is very important.

As interest rates approach the lower bound each percentage point shift lower in mortgage rates has an exponentially large impact on the interest cost of servicing debt because the percentage change in mortgage rates increases. In many ways that explains why property prices accelerated so quickly following the RBA’s rate cuts in 2019 –the percentage change in interest rates was large because mortgage rates were already very low.

Our message here is very simple –the cost of money impacts all asset markets including housing. The reason that asset prices, including dwelling prices, can seemingly decouple from the economy comes down to largely one thing –central bank policy and changes in the cost of money.

Risks

Back in April we wrote the following: “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. 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.”

As it turns out both risks essentially materialised. The best case scenario happened for all states other than Victoria where the downside scenario materialised.

Relative to our updated forecasts the risks are skewed to the downside. Any imposition of restrictions would likely see prices fall more than our central scenario which is based on no further lockdowns and a recovery in national economic activity from Q4 2020.

I am actually more bearish on the property market in early 2021. By then, most of the artificial economic supports are scheduled to unwind, including:

  • Emergency income support (JobKeeper and the JobSeeker supplement);
  • Mortgage repayment holidays;
  • Early superannuation release; and
  • Temporary rules preventing bankruptcies and insolvencies.

The expiry of these measures is likely to usher a significant number of forced sales, placing downward pressure on property prices.

The risks are obviously greatest for Australia’s army of negatively geared landlords caught between falling dwelling values and rents.

Whatever the case, 2021 will be an interesting year with any number of potential scenarios possible for both the economy and property market. It could go any number of ways and one cannot be too confident.

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. The RBA has already said that they will ask the media and property listing sites not to report prices if property prices drop 10% or more.

    They have also floated the idea of a trading halt if prices fall more than 15%.

    Simply put, CBA is right, the RBA will not allow property prices to fall.

  2. Melbourne bayside there has been a flood of new rentals on the market since Monday. Looks like a whole heap were getting held back hoping for inspections next week but have caved instead of holding out till late October.

  3. You’re ignoring the supply side. Price is the point at which supply equals demand…so prices won’t fall if listings and buyers are falling at the same rate.

      • Well I think CBA are basing their analysis on very narrow assumptions & wrong assumptions.

        First they believe rates will stay low (wrong)
        They don’t know the international shock that’s coming

        Honestly Divya to tell you the truth i didn’t even read it.

        Warren Buffet has always hated gold and only had Berkshire AGM and said he was happy with all his banks

        What does he know to sell all his bank shares and take a huge stake in that gold miner

        There is something he knows..

        Has CBA included the likelihood they are going to need a full bail out in the next 6 or so months

        There is a major international banking crisis not far away … will it trigger the unwinding of the global derivatives market … I think so

        CBA cannot see what’s coming

        I doubt CBA will be in its current structure this time next year actually earlier

        I have no idea what they do if the AUST banks collapse …. think they’ll close them and do some sort of restructuring very quickly like they did in the US GFC, in that movie. You tell me… maybe merge them all into 2 banks, nationalise one

        Your guess is as good as mine

        In the next 6/12 months Australian property is going to crash like Ireland and I said a year ago

        The chicken or the egg

        Will collapsing 1 house prices drag the banks under or 2 will collapsing banks drag property under

        I think 2

  4. And by the way, all of those ‘artificial economic supports’ either are or will be extended in some form or another.
    To echo Cas, there is no way that SFM will allow prices to fall. MMT or not they will continue the support rather than go down in history as the PM who presided over the worst property crash ever!

      • Jumping jack flash

        Everyone is way too busy repaying their colossal debt to care so if nobody says anything about it, everyone will forget about the recession in a couple of weeks.

        We’ve been in recession for over 10 years anyway, so its just BAU.

  5. All the supports have been extended to end of the year/next March. What stops them actually just indefinitely extending the supports? So who would actually complain about companies never having to admit they are insolvent (lol), but serious question?

    • People have become so accustomed to massive financial stimulus in the US that they just see it as a new normal and without consequence – its absolutely not.

      Debt and its associated problems are still without us, MMT absolutely WILL NOT be implemented without a global accord to abandon the entire global financial system and start again – that is just NOT going to happen. It simply isn’t.

      So we are left with the reality of a massive government debt and collapsing private economy with insurmountable public spending propping up the economy while taxation receipts collapses/ scomo cuts.

      Sure the ratings agencies are now just another arm of the five eyes weaponry – but the global currency wars are real and are heating up.

      The spending the government has already engaged in, the private debt levels PRIOR to covid and the collapsed private / public economy mean consequences are very much coming within months. More than likely weeks.

      Global banks, hedge funds, pensions, reserves etc are now all starting to pinch. The dam is breaking. When it goes we will be one of the very first pushed out the nozzle.

      A good way of looking at the “blow back” and support is like what has been done with renters. Everyone thinks they need support and should not be evicted – but there is a massive line of landlords, and banks, and investors who are all reliant on those rents who have simply been put on hold – they don’t matter.

      But they do. We are a renter in the global market – we are not America, nor the UK – we are not a bank or a landlord or even an investor – we are a lowly renter, in a share house.

      Eventually the rent and back money must be paid – and most likely we will get evicted anyway, with a bad credit rating, and a huge debt we can never repay.

      There is NO free lunch.

      • Jumping jack flash

        “People have become so accustomed to massive financial stimulus”
        This!

        There was once a time when interest rate manipulation was an economic taboo, now its performed every other month or thereabouts. Nobody thinks anything of it.

        There was once a time when even a quarter of a million dollars of debt was cause for panic and alarm, now pretty much it is expected that your mortgage is going to be something around double that amount. And incomes certainly havent doubled since then.

  6. TailorTrashMEMBER

    You don’t have to pay your mortgage , you don’t have to pay your bills . Government money is pouring out to business reporting improved earnings and bigger bonuses. The all important house prices to resume rising .
    Straya mate …what’s not to like about it

    • “Hi my name is TaylorTrash and I have no idea what it was like living in Australia when our debts were so high we were a banana republic. Having huge debts and no income is not a problem – just ask anyone Broadmeadows”

      • TailorTrashMEMBER

        Think you might have missed I was being sarcastic …
        ……change word don’t to can’t pay …and how can house prices rise ….for houses to transact at higher prices …bigger debts need to be taken on ….if people are struggling at present levels how will the economy generate the real money to service the increasing debt

    • Yeah but from Sept 24 the asset test and the liquid asset will be applied to jobseeker. That’s ok if you’re on JobKeeper but little old me in lockdown Vic has this situation (and I’m not complaint about any unfairness here just stating my situation). Local gov owned company is my employer so although we’re not allowed to operate so 100% loss of income, illegible forJobKeeper. I’m lucky enough to get jobseeker, many of my colleagues can’t get it so were into the10 th release of the emergency hardship fund (we had about 25 permanent employees and 300 casuals). As a single non homeowner in allowed up to 480K in assets once the asset test is applied (which I think is surprisingly generous and realistic for current day Straya) but I can’t have more than 5.5k in liquid assets as a single worth no dependents or I have wait between 1-13 weeks for jobseeker. Now basically everything under the sun is classed as a liquid asset including money I may have lent you but you haven’t paid me back, shares, precious metals etc. Deposits in a first home saver account aren’t but I’ve no idea if their system correctly identifies this. Depending on the markets I’m not even approaching at the halfway mark of the 480k I’m allowed to have in total assets before I’d be ineligible for jobseeker, but I have a decent small share portfolio that has more than doubled this year and my precious metals are up by nearly 100%. I have shares and precious metalsbecause due to my personal situation they’re theonly way in hell I have a hope of eventually being able to buy a home somewhere in this state. No one at services Australia can tell me if I’ll lose jobseeker because of my liquid assets (which I’m not selling and putting into a first home savers account because I’m finally getting asset appreciation that’s way above the interest rate) and no one cantellme if I wait out 13 weeks and still have more than 5.5k in liquid assets if I can then get jobseeker, but based on the oh so generous nature of thefederal gov I have my doubts.

      My point is that if things go the way it looks like, I’ll be losing jobseeker and not getting it back and I have no idea when my employer will be allowed to operateagain. Which brings me to the fact that I need to update my qualifications annually and currently that can’t be donein a Covid safe manner because of Strayan institutional stupidity so I may be forced to resign as I have a compromised immune system and while I think my chances of dying if I get it are slim, it’s the long term health effects that scare the hell out of me. Now I’m not saying the gov should fund my house deposit savings but I can’t be the only person on jobseeker who is looking at being caught out by the liquid asset test and believe me that will have a truly negative effect on the economy as many others without family support will see their house deposits vaporise. And because of all the above I’ve kept my discretionaryspending to about $200 in the past 3 months (and some of that is a kindle unlimited subscription which goes to Amazon).

        • Why should the govt give welfare to those who have highly leveraged those assets in a house?
          So they took more risk and took on more debt and voila, they get job seeker? What is the issue with illiquidity that they cannot sell a house they cant afford as opposed to having the tax payer support their risky decisions? If you have a milliom dollar house but cannot support yourself to get food on the table then sell three house, get a million bucks and rent as a first option?

      • TailorTrashMEMBER

        Sorry to hear of your predicament Pop
        …..yes when the government starts to cut off
        jobseeker to those with only $5.5 in liquid assets ( about a months worth of decent living in hugely expensive straya ) then those people will be pushed into further stress.

        With this small buffer then spent and super withdrawals exhausted the furniture has all been burned
        ….winter is coming…..

  7. Notice how they have every single chart imaginable but not one showing a dollar value for each capital city.
    What I want is a chart pricing the house and apartments average and median price movement in dollar values both in full sale price and price per square meter.
    Dont give me expectation and sentiments, hedonic indexes, new lending, clearance rates etc…

  8. I saw one line am I reading correct
    CBA out a note in APRIL 2020, what’s that about 4+ weeks after a global pandemic was announced and the whole of AUST was in lockdown that prices would fall 10%
    If I asked a group of primary school kids what house prices would do in April 2020, I think they’d know that too

  9. Feels like prices are headed down.

    However, the data showing how the savings rate has spiked significantly is pretty worrying to me (I think MB did a post about it yesterday).

    With an increase in savings, more people should have cash to put down a home deposit, putting upward pressure on prices.

    Anyone agree/disagree with this?

    • LittleEmperorMEMBER

      They’re saving for when the government stops injecting a sizeable portion of gdp via jobseeker and “jobkeeper” in October. Also remember no travel this year so that foregone expenditure is saved.
      The savings will hopefully allow some to remain afloat for a few months but long-term 6 months worth of elevated savings won’t go far.

  10. CBA has the biggest residential mortgage book in the country and stands to be hurt the most in the event of falling property prices. Now I’m sure those thoughts never entered the head of their totally objective Spock-computer logic like Chief Economist’s head a few months out from year-end when they wrote this article…

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