The shock from the COVID–19 pandemic has upended the property markets.
There's always the temptation to compare the current events to previous recessions and this was the subject of recent commentary by Westpac in their latest housing market update.
Westpac's economists said:
While there has been positive news around containment, the path of the virus and associated social restrictions remains highly uncertain.
Likewise, while a near term recession is assured, the exact scale and duration is unclear.
A range of policy measures are working to dampen the shock and slow the transmission to housing but the sector is now clearly facing into a very difficult few years.
A shock unlike anything we've encountered before
The COVID–19 pandemic represents a singular event that is unlike any shocks or cycles we have encountered since most macroeconomic measures were developed last century.
The absence of available precedents, and both the nature and speed of the shock (Australia went from a few dozen cases to several thousand and a full-scale lock down in less than three weeks) mean we have had to develop a different approach to assessing its economic impacts.
For housing, the main channels through which the shock is impacting are indirect – via household incomes, employment, conﬁdence, and migration ﬂows.
This contrasts with previous recessions and the GFC.
Whereas property has usually been at or near the front line of cycles in the past, this time around it’s ‘collateral damage’.
That said, the impact is still set to be large and the sector poses important risks to the outlook, particularly once we move beyond the immediate disruptions from the virus shutdown.
Charts 7–9 show the lead-in and evolution of key aspects of the housing market through previous recessions in the early 1980s, the early 1990s, the GFC and the current Coronavirus recession (including Westpac’s forecasts).
Every episode has its own speciﬁc features but there are two clear points of difference with the current downturn:
- It is was not preceded by a monetary tightening cycle; and
- The starting point for housing is relatively subdued.
Every previous recession was preceded by signiﬁcant interest rate rises to ‘high’ levels (that contributed to the subsequent contraction).
However, the lead–in to 2020 has been one of falling rates as the RBA has sought to counter persistent sub–par growth.
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On housing, conditions have typically been strong leading into previous recessions but have been mediocre heading into the current episode: dwelling investment near historic lows as a %GDP in 2019, turnover lifting but from record lows in 2018, and prices rising but still coming back from a material adjustment in 2017–18.
The point is that the current situation bears little resemblance to the ‘boom–bust’ cycles that have driven recessions in the past.
The key dynamic is instead a very large external shock ― a health emergency that sees a wide range of economic activities temporarily prohibited.
The absence of monetary tightening and a preceding boom goes some way towards limiting the hit to housing.
However, a hit is still likely.
The shock to the economy is large – even once near term disruptions wash out, GDP is expected to be down 5%yr and the unemployment rate 3ppts higher by year end.
This sizeable fall in income and wave of job losses will weigh heavily on housing.
Moreover, in contrast to the early 1980s and early 1990s, households are entering the current recession with high debt levels.
That constrains the extent to which a rise in leverage can support housing and also runs the risk of a move to household deleveraging compounding the adjustment, as it did during the GFC.
The bottom line is that housing weakness looks likely to be similar to past recessions with some risks on either side.
Source: Westpac Housing Pulse 2020. This material contains general commentary only and is not intended to constitute or be relied upon as personal financial advice.
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