House prices growth set to slow

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AUSTRALIA’S stunning housing market rebound is set to end as price growth slowed in March, and prices could fall by as much as 10% by the end of this year, with fears that a drop of 20% could be in play.

CoreLogic’s latest Home Value Index showed housing values rose across every capital city during the month, apart from Hobart which declined 0.2%. Sydney and Melbourne increased by 1.1% and 0.4% respectively, Darwin rose 2.0%, while Brisbane and Canberra grew 0.6%, Perth by 0.5% and Adelaide by 0.3%.

Sydney prices have now risen 14.3% from their trough and are just 2.7% from their 2017 high, while Melbourne prices have now risen 13% and continued to move into benchmark territory.

Over the March quarter every capital city recorded a rise. Sydney had the highest growth in the period, with values increasing 3.9%, followed by Melbourne at 2.9% and Canberra at 1.7%. Darwin and Adelaide posted the lowest, each at 0.6%.

CoreLogic head of research, Tim Lawless noted that recent trends in the market have become less relevant as we move into a period of unprecedented uncertainty due to the coronavirus outbreak, which is likely to impact further on household confidence and drag Australia’s economy into a recession for the first time in almost 30 years.

“The housing market won’t be immune to a drop in sentiment and weaker economy, however the extent of the impact on dwelling values remains highly uncertain.

“Capital growth trends will be contingent on how long it takes to contain the virus, and whether additional constraints on business or personal activity are introduced.”

Prices could fall by 20%

AMP Capital chief economist Shane Oliver said property sales are likely to slow to a crawl in the months ahead, as sellers and buyers are likely to put property transactions on the back burner to avoid catching the virus and in order to comply with social distancing requirements.

“More significantly prices are likely to fall as unemployment rises triggering debt servicing  problems for some against the back drop of very high household debt levels and high house prices in Australia and depressing property demand even for a while after the shutdowns are relaxed.”

The absence of new migrants for the next six months or so will also act as a drag on property demand.

“Hopefully the Federal Government’s wage subsidy program will keep the rise in unemployment to below 10% and this combined with various income support measures and bank mortgage payment holidays will serve to keep forced property selling to a minimum and price declines modest at around 5%.

“However, a long and deep coronavirus driven downturn in the economy that pushes unemployment well above 10% and sees it decline only gradually long after the six monthly wage subsidy and mortgage payment holidays end combining with a significant increase in financial stress for stretched landlords as tenants struggle to pay rents would point to a deeper property price downturn of 20% or so over the next 12 months.”

He said the Sydney market is most at risk given higher debt to income ratios and a greater supply overhang.

Auction ban to hit prices

Auction clearance rates fell sharply during March to nearly 30% after adjustments for unreported results, as listings surged to get ahead of shutdown restrictions and buyers held back in the face of rising coronavirus related uncertainty, Oliver said.

Ben Udy, Australia and New Zealand economist at Capital Economics, estimates that auctions make up around 16% of home sales over the last year.

“While homes can still be sold otherwise, the ban on auctions is another headwind to home sales. Auction clearance rates were already pointing to lower house price growth before the ban was implemented,” he said.

“The RBA has eased policy considerably over the past month. That should keep mortgage interest rates at low levels for the foreseeable future. Even so, the sharp decline in consumer confidence in recent weeks along with our view that the unemployment rate will rise above 10% before long will mean that fewer households will want to or be able to afford to purchase homes in the coming months.

“The upshot is that we expect prices to decline by 5% to 10%. Dwellings approvals shot up by nearly 20% in February but if we are right and prices decline over the coming months we think building approvals and construction will slow in turn.”

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