The coronavirus pandemic has forced many households to think differently about how they work, educate their children and prepare for financial shocks. The Australian love affair with real estate is also about to be sorely tested.
The majority of banks, leading economists and academics believe bricks and mortar won’t pass unscathed through the downturn and property prices may fall significantly for several years.
For the majority of home owners, whose personal wealth is often reliant on the state of the property market, this will be most unwelcome news. Just three months ago the owner of a median-priced Sydney house had just been named a millionaire – again – while Melbourne’s median prices were nudging $820,000.
At that time economists were just starting to mention coronavirus as a possible “dampener” on the property market.
But this week the country’s biggest lender for home loans, the Commonwealth Bank of Australia, predicted 11 per cent property price falls from March 2020 to March 2023 as their “base case” scenario. In a prolonged downturn, where jobs do not recover quickly, CBA suspects declines could be as drastic as 32 per cent. National Australia Bank has forecast an 11 per cent decline in 2021 as a base case, and estimates price falls of more than 30 per cent over the next two years in a severe downturn.
As safe as houses
The small Queensland mining town of Moranbah has become a cautionary tale for property investors. At the start of 2013, the peak of the mining boom, the median-priced house in this remote town was $750,000. By the end of the year it was $500,000 as the work dried up and investors sold quickly. Today, houses can be bought for half this price again.
Sydney and Melbourne are unlikely to act in such an extreme way. Not every industry has been decimated by the pandemic, about a third of homes in both cities are owned outright and most will do everything they can to repay their mortgage. But like any property market, the strength of prices is underpinned by supply and demand. If people are unable or unwilling to pay the prices they were before, home values are likely to decline.
CoreLogic head of Australian research Eliza Owen says the impact of COVID-19 on values will vary from region to region depending on the level of exposure to industries hardest hit by the virus.
“Inner Melbourne virtually sees all its population growth from overseas migrants. When overseas migrants come to Australia they tend to settle in cities and they tend to rent. That has an impact on values,” Owen says. She suspects home values will fall by up to 10 per cent within the next 24 months.
“The general pattern we’re seeing, and what we’ve seen from previous negative economic shocks, is the biggest impacts over the next 12 months will be in the rental space and in sales volumes.”
The rental market has already started to show signs of struggling in some areas. For instance, high-density sections of Melbourne, like Docklands, and in Sydney, such as the CBD and Ultimo, where two-thirds of homes are rentals, have seen vacancy rates triple. In these locations more than one in 10 rental apartments are currently sitting empty.
In general these are areas where international students and young people typically working in retail and hospitality live. These two groups have been particularly affected by the shutdowns.
Property owners who lease their homes and rooms out on Airbnb to tourists at higher rates have also started putting their properties onto the private market. According to data website AirDNA, which tracks Airbnb listings, the number of active short-stay holiday rentals in Australia fell from 202,000 in early February to 164,000 by the end of April. New bookings fell from 78,000 to 27,000 over the same period.
Rents dropped by 0.4 per cent over April, but so far house prices have not seen major falls, Owen says.
“At the moment we’re not seeing an influx of distressed properties come to market and [for sale] listings were 43 per cent lower in April. That’s preserving property values.”
Another reason prices have held up could be the intervention of the banks and government assistance for those losing work. Right now about 400,000 people who cannot afford to pay their mortgages due to a loss of income have been given a break from payments by the big four banks.
At the same time the federal government is providing record stimulus for households, including the wage subsidy scheme JobKeeper and a more generous unemployment benefit through JobSeeker.
UNSW professor and director of the City Futures Research Centre Bill Randolph questions how long this assistance will help the market hold up.
“The lenders have seen the writing on the wall and have moved to avoid immediate problems, but if you’ve lost your business or your work, you’re going to be facing longer-term problems than the next six months,” Randolph says.
“There will almost certainly be some blowback in terms of negative equity for people in danger of not being able to pay their mortgage. That will slowly unravel and impact prices if people foreclose and there’s a fire sale. There could be all sorts of longer-term impacts.”
Sydney and Melbourne home owners who have held onto their property for many years would be cushioned by equity from price surges over the past decade, he says, but those who have bought in the last two years would “probably be facing negative equity” soon.
“You can usually sit through these things if you can repay the mortgage, but the double whammy is so many people are losing their incomes and have financial commitments.”
However Property Investment Professionals of Australia chairman Ben Kingsley, who is also a buyer’s agent, is expecting a “strong uplift in listings come September”.
While he acknowledges medium and high-density homes in the inner CBD and city fringes will be hard hit, he expects higher-priced family homes will hold on to their values.
“For the established owner-occupier property markets, we still expect first home buyers showing up and competition with astute investors on the demand side of the equation,” he says, “Especially in the $1.5 million house range in Sydney and around the $750,000 to $1 million range in Melbourne.”
Simon Pressley, head of research at buyer’s agency Propertyology, suspects there may even be a small amount of price growth in the next 12 months in some markets.
While he’s aware his assessment is at odds with those of banks and economists, he expects the very low supply of homes for sale will see a “dynamic which resembles seagulls fighting over chips”.
The majority of people are not expected to lose their jobs and with record low interest rates, those who maintain their incomes are in a strong position to borrow.
“On the demand side, record low interest rates, first home buyer support and sensible credit policy provide fantastic support for buyers,” Pressley says.
The Morrison government has passed the $84 billion stimulus package in an effort to slow the economic impact of the coronavirus pandemic.
Cranes on the skyline
In the construction industry the housing crunch has been a long time coming. Craig Delaney, chief executive of Melbourne-based developer Long Island Homes, started to see a slide in business in August 2019 and the pandemic has compounded the decline.
“In the past two to three months new site starts have fallen off a cliff,” he says. “The industry has seen business drop substantially, possibly up to 40 per cent, with house and land inquiry coming to a complete halt in some metropolitan areas.
“Banks have stopped lending to non-essential industries, bringing great uncertainty to prospective clients as to whether they can actually obtain a construction home loan at all.”
Had it not been for the JobKeeper scheme, 30 per cent of his 40-person team would already be facing redundancy: “It would’ve been one of the worst days of my life.”
Now Delaney wants the government to open up more foreign investment in the housing market as well as encouraging the banks to lend through a government guarantee covering new-loan defaults with Commonwealth funds and loosening up restrictions on lending.
“We need different, more creative types of stimulus and the government needs to have the courage to implement this.”
Delaney’s situation is not unique, with Urban Development Institute of Australia (UDIA) NSW chief executive Steve Mann saying there are challenges in restocking the development pipeline, including securing presales and financing for future projects.
“While demand and settlements are steady and we are seeing anecdotal evidence of increasing enthusiasm on behalf of buyers to commit to land purchases in the current climate, our only fear is … how sustainable it will be,” he says.
More than two-thirds of members surveyed by UDIA were concerned about the ongoing impact of the virus on their projects, with about half suffering due to supply chain effects, staffing with social distancing and sales. Some projects have been delayed by up to 180 days, with an average delay of a month.
Mann says the government could consider co-financing projects with debt or equity, the acceleration of greenfield development sites and more infrastructure directly unlocking housing supply.
“Contract home builders have only a few months [of work] left … forward orders are very low. We need shovel-ready projects to come to market now, which will keep our trades in their jobs and help drive the economic recovery beyond COVID-19.”
The construction industry is a major driver of jobs in NSW and Victoria, with about 1 million people reliant on jobs in the industry nationwide, and the sale of new homes boosts spending in other areas. It is well documented that new home buyers typically spend up on new white goods, cars, furniture and other goods.
This adds urgency to what Housing Industry Association (HIA) chief economist Tim Reardon describes as an expected “quantum shift” in home building this year.
The building industry had already contracted about 20 per cent in the 18 months to March on HIA figures.
“The Prime Minister said [a week and a half ago] there would be an 85 per cent reduction in net overseas migration and if that did play out … it would mean levels of home building well below the 1990s recession,” he says.
“In a best case recovery scenario, including the V shape that Treasury is advocating, we won’t get back to the level of economic growth in February until mid-2023. That’s best case scenario.”
Booms and busts
Following previous economic shocks like the global financial crisis and the Asian financial crisis property prices fell about 10 per cent, says Diaswati Mardiasmo, chief economist for real estate company PRD. But recovery was also driven through the housing market.
“We’ve learned from these previous events that house values are normally pretty insulated, it’s the volumes that will drop. What this means is that there are less sales, however those that do sell still relatively maintain their value,” she says, adding low interest rates would also insulate prices.
“Assuming we are back to the pre-COVID economic pace within the next 12 to 24 months, and with all of the current government stimulus and historical low interest rates on a steady platform, we should start to see a market recovery,” she adds.
Reardon says the sign of recovery will be when population growth returns to 1.5 per cent through international arrivals. This will be dictated by the lifting of global restrictions on borders, which is directly affected by the spread of the virus.
“In previous economic cycles we’ve seen the home building sector as one of the main sectors used to stimulate economic activity and employment,” he says.
“We certainly saw that post-GFC home building had a key role in the recovery. We’ve seen state and federal governments working together through the COVID-19 response and a similar industry-by-industry approach will be necessary in the recovery phase.”
Randolph also suspects there will be a recovery through housing stimulus, potentially using assistance for first home buyers. As part of the GFC stimulus the Rudd government tripled the first home buyers’ grant to $21,000 and only gave it to those buying brand new or off-the-plan properties. This might mean more young buyers enter the property market.
There could also be more radical changes in the future, Randolph says, including a fresh way of looking at the incentives for investment and affordable housing.
“We have to wake up to the fact the housing market is failing,” he says.
“The pandemic allows this government to ask questions it could not possibly address before. This includes looking for tax savings. Negative gearing is an obvious one.
“I suspect those things are on the table in a way they’ve never been before.”
Jennifer Duke, The Sydney Morning Herald, 17 May 2020