Are house prices falling? Not yet, but residential property prices are certainly not immune to the impacts of the coronavirus pandemic.
Predicting property prices is a favourite pastime for many economists but in most circumstances, forecasts are inaccurate. During the coronavirus crisis, there have been projections of house price increases as well as major price falls, while some say the falls are already occurring.
What we can say with some certainty is that major financial support measures from the Federal Government will reduce the likelihood of significant price falls – at least in the short-term.
Without wage subsidies in the form of JobKeeper payments, increased welfare through JobSeeker payments and mortgage holidays from the banks, the housing market would have been experiencing potentially large price falls by now.
However, the stimulus has resulted in a fall in the number of property transactions taking place. While sales are still happening, it is more a case of willing buyers and sellers transacting on property as opposed to distressed sales, which are typically seen during a recession.
It’s worth noting, while lenders have offered mortgage holidays in the past including during the Global Financial Crisis in 2007, welfare payment increases and wage subsidies are not typically features of economic downturns.
This reflects the fact that COVID-19 is not a financial crisis but rather a health crisis, which has stopped businesses from operating and people from going about their everyday lives.
The reduced demand for properties during COVID-19 has been coupled with a reduction in an already low volume of properties listed for sale with many vendors choosing not to list homes for sale amid the pandemic.
But interestingly, since state and territory governments began lifting COVID-19 restrictions, the property market has responded with a jump in the number of new properties being advertised for sale on realestate.com.au.
From here, the challenge for the property market, assuming COVID-19 remains under control, is what happens when JobKeeper payments and mortgage holidays are removed and JobSeeker payment amounts are reduced in September.
Many hope that the Federal Government and lenders would take a pragmatic approach to winding-down financial support measures, particularly since a $60bn miscalculation in the cost of the JobKeeper program was announced last week.
But for now, all levels of government seem keen to re-open businesses and get the economy moving again, as they know these support measures can’t remain in place for good.
The Reserve Bank (RBA) has forecast an unemployment rate peak of 10% in June 2020, falling to 9% by the end of the year and dropping further to 7.5% by the end of 2021. The current forecast period is until June 2022 and has the unemployment rate remaining well above the pre-COVID-19 level of around 5%.
Additionally, the RBA is not forecasting underlying inflation to return to its target range of 2% to 3% any time between now and June 2022.
While low inflation and high unemployment significantly reduce the likelihood of any movement in the cash rate between now and June 2022, a slow reduction in unemployment could pose challenges for the residential property market.
A high unemployment rate won’t necessarily lead to price falls – it hasn’t in the past – but if the projected high rate of unemployment leads to distressed sales after wage subsidies and mortgage holidays expire, then depending on the magnitude, that could be a hurdle for the housing market.
On the flip side, with the official cash rate at a record-low of 0.25% the cost of servicing a mortgage debt has never been lower. This also means borrowing costs for lenders are lower, which could lead to their willingness and ability to lend more money for longer.
Unlike shares, property is difficult to buy and sell with back-and-forth offers, cooling-off periods, pest inspections and finance approvals. In a situation such as COVID-19, the non-liquid nature of residential property is somewhat advantageous.
While it is still too early to tell if property prices are falling or will fall, the financial support that has been put in place will dramatically reduce the likelihood of significant price falls.
But the litmus test will come when the Federal Government and the banks end their financial support and the economy moves into the recovery phase.