Inevitable house prices correction looming

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HOUSE prices in Sydney and Melbourne could drop by at least 10% over the next six months as part of what the Commonwealth Bank describes as an “inevitable” house correction amid the coronavirus pandemic.

In its revised market forecast released on Friday, the major lender tipped all capital cities to experience heavy falls. Melbourne is likely to cop an 11% to prices, and Sydney, Darwin and Canberra 10%.

Adelaide, Brisbane and Hobart are in for 8% falls, and Perth 7%.

Gareth Aird, CBA’s head of Australian economics, said 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,” he said.

Sydney and Melbourne are more exposed to by the abrupt halt to net overseas migration, as well as the expected fall in foreign demand, while NSW and Victoria have more exposure to the most heavily impacted services sectors and less exposure to more insulated sectors such as agriculture and mining.

“We expect both Sydney and Melbourne to underperform relative to the national benchmark,” Aird said. Despite a small uptick at the end of the year, prices in Melbourne are expected to have fallen 8.4%, and by 6.4% in Sydney.

“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.”

However, Aird said that while it took some time for unemployment to lift following the 1991 recession, it is likely to rise and fall quickly this time, limiting damage to the property market.

“The sudden spike in unemployment will mean the impact on the property market is immediate but should not be as long lasting.”

AMP Capital’s chief economist Shane Oliver has predicted house prices could decline by 20%, should the coronavirus-driven downturn in the economy push unemployment well above 10%, with only gradually improvement long after the six monthly wage subsidy and mortgage payment holidays end, and combined with a significant increase in financial stress for stretched landlords as tenants struggle to pay rents.

CBA’s best case scenario is that the government begins to lift restrictions on economic activity by the end of May. If restrictions were eased, however, and spike of coronavirus cases results, the hit to the housing market 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,” Aird said.

The Westpac/Melbourne Institute Consumer Sentiment report showed confidence in price gains over the next 12 months had fallen to its lowest level since 2009, while sentiment in the latest ANZ/Property Council Survey fell to a record low in March.

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