This week we learnt that Australian dwelling prices rose 0.7 per cent in March, a slower monthly gain than recently but still positive and enough to lift the annual growth rate to 8.9 per cent.
However, if a week is a long time in politics, a month is an eternity in the COVID-19 crisis.
While it’s difficult to put exact numbers or forecasts on what will happen to property in the next six to 12 months, it’s likely the market will experience a major disruption from the worsening Coronavirus situation and the related hit to the economy.
As it stands, we expect GDP to suffer a material contraction in the June quarter as the unemployment rate rises to 9 per cent, before a recovery in jobs and the broader economy later in the year. All up, the economy is expected to contract by 5 per cent through the 2020 year and suffer its first recession in almost 30 years.
So, what does it mean for property?
Firstly, it’s worth noting the government's tighter social distancing measures including an outright ban on physical auctions and open homes only came into effect in the last week of March, so it’s too early to tell the precise impact.
But with various governments’ broader lock down measures to become more pervasive in coming weeks, it’s likely property markets will effectively move into a forced hiatus as social distancing restrictions and elevated economic uncertainty heavily discourage both buyers and sellers.
Already, data from last weekend showed a significant drop in auction clearance rates with many withdrawn prior in the wake of the government’s outright ban on physical auctions (about a third of all scheduled auctions in the case of Sydney). And don’t forget, prices in several cities, including the biggest of Sydney and Melbourne, were already at or near record highs heading into this crisis, potentially leaving them vulnerable to falls.
On the flip side, forbearance from lenders and scaled-up fiscal support for affected workers – for example the new $130 billion JobKeeper scheme – should limit the flow of “urgent” sales that could precipitate steep price falls in this situation.
In addition, recall that the RBA made two 25bp rate cuts last month with the average mortgage variable rate reduced by around 30bps – ordinarily a move that would provide significant support to residential property prices.
In short, predicting where property prices are headed is incredibly difficult in this fast-moving, uncertain COVID-19 crisis. While price data is timely, prices may be slow to reflect virus impacts.
But what we can assume with a fairly high degree of certainty, is that trading is likely to become extremely 'thin' with both buyers and sellers pulling out of the market for the time being.
This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.
By Ben Young
Head of Fraud and Financial Crime Insights