Nationally, housing market values did not see the large decline anticipated at the start of the COVID-19 pandemic.
Though performance was mixed across the state and territories, the national housing market had seen a -0.8% decline in the June quarter, which deepened to -1.7% in the three months to August.
However, in recent months the housing market has seen a trend toward a recovery in values.
In the three months to November, dwelling values had risen 1.1%, recovering over half the value that had been initially lost to COVID19.
National dwelling values are now just 1.2% below the record high value reached in October 2017.
Moreover, the recovery trend is now more broad-based.
In the month of November, the Melbourne dwelling market saw an increase in values of 0.7% following 5 months of consecutive decline.
Sydney and Melbourne appear to be the dwelling markets most impacted by COVID-19.
Though values rose across both these cities in the month of November, values are sitting at around 2017 levels.
Meanwhile, the Brisbane, Adelaide, ACT and Hobart dwelling values are now at a record high.
Regional Australian dwelling markets continued to outperform, with particularly low stock levels placing upward pressure on values during a time of rising demand.
There are numerous factors which have prevented a larger downturn in dwelling values, which are explored throughout this report.
These include the institutional, coordinated response to the pandemic, which have seen low borrowing costs, added incentives for first home buyers and the extension of mortgage repayment deferrals limiting forced sales.
The nature of the COVID19 downturn has also had a more acute impact on the rental market than purchase values.
Additionally, there is a broader economic recovery evident as COVID-19 remains well contained across the country, and hopes for effective vaccines emerge.
As the continued economic recovery converges with highly accommodative monetary and fiscal policy, demand for housing is expected to remain strong in the near term.
However, pockets of risk remain for inner city Sydney and Melbourne dwelling markets.
Additionally, there are longer-term economic headwinds stemming from slack in the labour market, and the end of temporary fiscal incentives for first home buyers.
This report explores the national economic recovery, and the relatively mild downturn observed in housing values to date.
A summary of the latest housing finance data and relevant policy is provided, as well as an exploration of housing market dynamics in the respective states and territories.
Economic and housing data released over the past few months suggest that the June quarter marked the worst of the economic fallout from COVID-19, with a recovery trend evident through the September quarter.
This was expected, given social distancing restrictions were at their strictest nationally from the 25th of March through to early May.
There is cautious optimism that economic conditions will continue to improve off the back of accommodative monetary and fiscal policy, although headwinds to this recovery remain.
In the 3 months to June, GDP contracted 7.0%, which is the largest quarterly decline on record, ending over 28 years in Australia without a technical recession.
National accounts data from the ABS suggest the decline was driven by a fall in household consumption, plunging a record 12.1% and detracting 6.7 percentage points from GDP.
This included a 17.6% decline in services consumption amid the temporary closures in business and restriction in movements.
The recession was not as steep as anticipated
However, the contraction in GDP over the first half of 2020 was not as steep as first expected at the onset of the pandemic.
By the September quarter, a 3.3% increase in GDP suggested around 40% of the decline had been recovered.
Other indicators have suggested a faster-than-expected economic recovery:
- After the number of people employed fell by 643,700 in the June quarter, total people employed rebounded by 420,646 by the end of October.
- Retail spending declined 17.7% from March to April, then rose 17.6% from April through to September.
- The Performance of Manufacturing Index (PMI) plunged 33% over April, but by October had climbed above 50.
A PMI of over 50 suggests expansion of manufacturing activity, and the October result marked expanding factory conditions for the first time since July.
The monthly Westpac-Melbourne Institute consumer sentiment index bottomed out at 75.6 in April, and dipped again through the second wave of restrictions in the September quarter.
However, sentiment has since surged to 107.7 in November.
Overall, the Australian economy is showing strong signs of recovery from what was ultimately a manufactured downturn in response to a health crisis.
Similar trends were earlier observed across China, one of the first countries to see a surge, then containment, of COVID-19.
However, the potential ‘hysteresis’ effect should not be underestimated.
In economics, hysteresis describes changes resultant from an economic shock that can persist for a long time, even after the cause of the initial shock has passed.
Hysteresis is evident in employment conditions, particularly when looking at a long time series of the Australian unemployment rate.
With the onset of the GFC, the unemployment rate surged from 4.0% in August 2008, to 5.9% in May 2009.
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Although unemployment had gradually been trending down, increased precariousness in the labour force meant that unemployment did not return to ‘pre-GFC’ employment levels before the onset of COVID19.
Similarly, COVID-19 poses lasting challenges to employment conditions, particularly as businesses have been forced to become less liquid and labour-intensive through the pandemic.
This could hinder economic demand in the long term.
Further headwinds for the Australian economy in the short term include renewed cases of COVID-19 until the successful distribution of a vaccine.
Another round of strict restrictions would further disrupt Australia’s economic recovery.
An additional risk is escalating trade tensions with China, which accounted for around a third of Australian export values in 2019.
Conditions in the housing market do not currently reflect these downside risks, as Australian dwelling values rose through October and November.
Indeed, the upswing in housing may contribute to the economic recovery through wealth effects and increased transaction activity.
Why have dwellings been so resilient through the recession?
At the initial onset of the pandemic, consensus around the trajectory of property market values was a decline ranging from a base-case scenario of 10%, to worst-case scenarios seeing property values fall by almost a third.
However, national housing market values declined just 1.9% between March and September.
Housing market values are now recovering, increasing 0.4% nationally through October and 0.8% in November.
Relative to previous housing market downturns, the current decline through to November seems relatively mild, with dwelling values just 0.7% below the pre-COVID levels.
Other housing market indicators corroborate a trend towards a recovery in values.
In the 3 months to November, CoreLogic sales volume estimates rose to be 0.9% higher than in the equivalent period of 2019.
The Westpac-Melbourne Institute ‘time to buy a dwelling’ index increased by 10.6% in October, and by another 8.0% in November.
New listings added to the market in the four weeks ending 29th of November rose to around 40,000, as Melbourne listings volumes more than tripled coming out of restrictions in the September quarter.
Auction activity rose
The combined capital cities auction clearance rate averaged to 69.8% over the four weeks to November 29th, which is higher than in the equivalent period of 2019.
Auction volumes also rose to an average of around 1,864 auctions per week.
This is up from an average clearance rate of 67.6% through October and around 1,350 auctions per week.
Even in Melbourne, where property values and sentiment have been most impacted by the pandemic, the clearance rate for the four weeks ending November 29th was remarkably high at 69.3%.
Several factors may explain the mild fall in Australian property values since March: Accommodative monetary policy, such as the new record low cash rate setting of 0.1%.
Monetary policy is covered more extensively in the next section of this report.
Combined with other factors, the low cost of mortgage debt is increasing demand for property.
The downturn was manufactured, and much of the job loss was contained to particular industries and demographics.
The pandemic has more acutely affected people who are younger, or work in sectors where people are more likely to rent.
For example, even though workers aged between 15 and 24 only averaged 14.9% of employed persons in the lead up to COVID-19, they made up 24.4% of job losses from March through to October.
While the economic and social costs of these job declines are devastating, many young workers, or those in precarious job sectors, are less likely to have mortgage servicing obligations.
Mortgage repayment deferrals and subsequent low levels of stock for sale.
The Australian Prudential Regulation Authority (APRA) were part of a coordinated response in ensuring stability of the finance sector at the onset of the pandemic.
On March 23rd, APRA announced that deferred repayment plans in response to the pandemic would not be treated as loans in arrears until September 2020.
In July, this concession was extended₅ on a case-by-case basis until the 31st of March 2021.
This allowed banks to extend deferrals, which likely limited forced sales and contributed to a decline in listings amid the height of economic uncertainty.
As of October, these deferrals have fallen to just 4% of all housing loans, suggesting the extension of deferrals is increasing housing market stability while jobs are reabsorbed and the economy improves.
However, not all property markets were mildly affected by COVID-19.
The following sections of this report highlight how different trends and varied performance are emerging across types of stock, buyer profiles and geographic regions.
But despite the variance present, there is a broader-based upswing trend emerging across property values, which we expect to continue into early 2021.
A gradual return to growth in the Australian economy and housing market seems likely, but is still subject to risks.