House prices are starting to be impacted by the recession and skyrocketing unemployment that has resulted from the government lock down of the economy as it has tackled the COVID-19 health crisis.
Having risen strongly in the 10 months since May 2019, house prices are now generally flattening out and in some cities, are starting to edge down.
There are some seismic changes unfolding in the forces that drive house prices and they point to a period of significant downward pressure over the next year or so.
The negative factors for house prices is long.
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The destruction in employment over recent months is an obvious one – it is hard to get a loan and then service that loan when you are not earning much or any money because you are unemployed or underemployed.
There has been a collapse in population growth as the borders have been closed to foreign arrivals which is taking away a key source of demand. Until the borders reopen and immigration levels increase, demand will be undercut by weak population growth.
At the same time, there is plentiful new supply available to come on to the market. Some of that is from a solid leves of new dwelling construction through to the end of 2019, some is from what looks to be a glut in rental properties exacerbated by Airbnb-type owners switching to longer term rentals.
All of this points to weaker house prices for the next 6 to 12 months.
It is not all bad news for house prices.
Interest rates are staggeringly low – no one should be paying more than 3 per cent on their mortgage which means those with secure work through the crisis should be able to tap the market.
There are grounds for tentative optimism in the second half of 2020 as the economy starts to reopen. By the September quarter, if things go well, a partial recovery in the labour market and the economy more generally will reverse some of the current negative drivers on house prices.
So far in the health crisis, the main impact on housing has been a sharp decline in sales and turnover.
Potential buyers are staying away despite low interest rates and sellers have withdrawn their properties from the market, presumably to avoid selling in such an uncertain climate. The ‘mortgage holiday’ given from the banks where repayments have been deferred until October 2020 means that there is little in the way for forced selling and fire sale prices.
All together, house prices have been stoic resilience.
According to the Corelogic data, only Melbourne and Perth have experienced house price falls and even then, the declines have been small.
From the recent peak levels earlier in the year, Melbourne prices are down less than 1 per cent and Perth prices, which were showing signs of life, has dropped a tiny 0.1 per cent. This is all small change in the scheme of the bigger picture house price cycles Australia has seen over many decades.
Prices in Sydney are still trending up, albeit at a slower pace that was the case a few months ago, while prices in Brisbane and Adelaide are also edging up rather than falling.
To be sure, some house price weakness is likely to be in the pipeline as the negative influences bite harder, but for now, there is little evidence of a sharp price decline.
Over the more medium term, the critical issues will be the net immigration intake, the return of international students to Australian universities and the number of new dwelling starts once the buildings currently under construction are completed.
If these structural drivers of house prices show a return to a lift in population in 2021 and 2022 and construction remains weak as developers shy away from new projects, dwelling prices are likely to resume their long run move higher as demand builds relative to demand.
Before that happens, there is likely to be a period where prices fall down as the bulk of the cyclical elements of house prices turn lower.
The falls should be contained to 10 per cent at most and with a little luck on the containment of the health crisis and the reopening of the economy, the falls will be significantly less than that.