What’s keeping property prices stable?

15th September 2020

The coronavirus pandemic has had a major impact on property trends but not a major impact on prices so far. 

Author John McGrath – The Real Estate Coversation

Certainly, prices have softened in some areas – mainly the big capital cities where there have been more virus cases but we’re talking less than -5 per cent in Melbourne and Sydney to date, according to latest official data from CoreLogic.

Prices in many regional areas have actually gone up because more people are working remotely from home on a permanent basis.

This is one of the positive trends to emerge from the virus.

We are yet to see how the economic downturn will fully impact market prices but CoreLogic’s latest Quarterly Economic Review provides a great snapshot of where we are today.

If you’re concerned about the economy and property prices, the following summary will get you up to speed.

Pandemic property trends: 

  • Property price falls have been very mild, even in Melbourne, largely due to record low-interest rates, loan repayment deferral options and stimulus measures including JobKeeper and JobSeeker. The decline was only 0.8 per cent nationally in the June quarter
  • The greatest impact on the market overall has been fewer transactions due to social distancing, periods of lockdown and reduced consumer confidence
  • Looking ahead, the resilience of property prices will partly depend on how well virus outbreaks are contained, as well as the economic fall-out which we are yet to fully experience due to ongoing stimulus
  • Containment has worked very well in all states except Victoria but it’s on its way out of the second wave now. Stage Four restrictions are proving effective. Meantime, the whole world is working on a vaccine as is our government to ensure that we have the inside track when they become available
  • Rising unemployment is always the biggest risk to property values. If people can’t pay their loans, they usually sell. Buyers also tend to delay decisions when they’re feeling uncertain. This can lead to an accumulation of supply, which softens prices. However, record low-interest rates are definitely helping to offset both risks
  • Historically, the RBA says there is a correlation between rising unemployment and mortgage arrears. However, job losses from the pandemic so far are mainly in industries dominated by renters. So, the impact of unemployment on housing values has been less than normal
  • Low-interest rates and competitive deals have made it possible for millions of Australians to refinance this year. This should help many owners who have retained their jobs but lost hours and therefore income
  • Household debt is high in Australia. In the March quarter, it was at a near-record 142 per cent of disposable income. However, RBA research tells us that over 50 per cent of loans have repayment buffers of 3 months and about 30 per cent have 3 years. So, a big chunk of the market is well protected
  • In terms of current loan deferrals, they represent 11 per cent of total housing loans in Australia. Some people on deferrals have begun re-paying their loans already. APRA has told the banks they can give deferral customers more time – until March 2021, if they need an extension
  • The rise of remote work is an enormously positive trend to come out of COVID-19. City dwellers have newfound freedom to live wherever they want on a much lower mortgage. (I’ll tell you where the regional hotspots are next week)
  • Residential real estate in Australia is worth $7 trillion compared to the equities market ($2 trillion) and superannuation ($2.7 trillion). Residential mortgage lending is about 60 per cent of banks’ total lending and housing is 53 per cent of household wealth. So, you can bet that the banks and government are going to prioritise policies that keep property stable

On the whole, Australian property has weathered past economic downturns incredibly well. CoreLogic data for the combined capitals shows home values fell -6.2 per cent during the 1989-1991 recession, and the GFC resulted in a -7.6 per cent dip in 2008-2009 and a -6.2 per cent drop in 2010-2012.

The subsequent bounceback between 2012-2017 was exceptionally strong, with Sydney and Melbourne house prices rising 66.9 per cent and 39.8 per cent respectively due to a strengthening economy, population growth, new infrastructure, an ongoing undersupply and falling interest rates.

So, on days ahead when things look gloomy, remember Australian property’s amazing track record of comparatively small pullbacks during major economic storms followed by healthy bouncebacks.

The views expressed in this article are an opinion only and readers should rely on their independent advice in relation to such matters.