The economic outlook for the Australian economy prior to COVID-19 was modestly positive.
Growth in housing market values was expected to extend over 2020, though it was anticipated that growth momentum would slow in the wake of affordability constraints, and higher levels of listings.
Amid the onset of COVID-19, and the resultant economic shutdown, the operating environment for the housing market has completely changed.
On aggregate, the Australian housing market is now on the cusp of another downturn.
National housing market summary, March 2020
|Combined capitals||Combined regional||National|
While it is difficult to forecast the economic outlook in which housing will operate, a recent address from Reserve Bank Governor Phillip Lowe suggested the second quarter of 2020 could see:
- National output fall 10%;
- Total hours worked fall around 20%; and,
- The unemployment rate reach 10%.
Governor Lowe outlined these conditions would mark the greatest economic contraction since the 1930’s.
The outlook would be even more severe without the delivery of unprecedented monetary and fiscal stimulus, totalling 16.4% of GDP in early April.
The most impactful restrictions on Australian real estate commenced between the 20th and 25th of March.
These included the closure of Australian borders, a shut-down of non-essential services, a ban on open real estate inspections and on-site auctions, and limiting public gatherings to two people.
By mid-May, onsite auctions were reinstated in most states and territories, and property inspections are gradually opening up.
But new housing demand is likely to see a continued decline, as borders remain closed to overseas migration, and unemployment rises.
Much of the downward pressure on the housing market was not captured in March quarter statistics.
However, there are early market indicators that can be used to understand some of the challenges unfolding in Australian dwelling markets.
The economic fallout from COVID-19
An important consideration for the Australian economy is its labour force and private sector structure.
One of the features of the Australian economy is that, unlike in Europe and America, almost half of Australian employees work at firms with a size of less than 10 people.
Such a large proportion of workers employed within small to medium enterprises arguably makes Australia’s workforce particularly susceptible to job losses, because small firms do not tend to have large capital reserves in the case of a downturn.
This is why much of the government stimulus has been targeted at small-tomedium sized businesses.
The Australian Bureau of Statistics has also monitored some high-frequency measures to track economic conditions.
A survey of trading businesses at the end of March found 90% of businesses were still operating at March 30 following strict social distancing measures.
However, some smaller industries are disproportionately impacted, including accommodation and food services (69% of businesses operating), information media and telecommunications (65% operating), and arts and recreation services (47% of businesses operating)₂.
Even for businesses still operating, 25.0% reported making a temporary reduction in staff working hours in response to COVID-19.
Again, this disproportionately affected food and accommodation services, with 70% of respondents reporting a decline in staff working hours.
This is often a tactic used by businesses as an alternative to standing down or terminating workers in tough economic conditions.
Changes in employee jobs by industry between 14th March and 18th April
An ABS survey of workforce conditions noted that between the 11th of April and 18th of April, 7.2% of paying jobs had been lost.
The highest portion of job losses were in food and accommodation services (-33.4%), and arts and recreation services (-27.0%)₃.
The chart on page 6 looks at the total workforce exposure to these two sectors across the greater metropolitan regions of Australia.
The data suggests that the impact of strict social distancing measures would be most heavily felt across Hobart.
This is already partially reflected in property value and rental declines over April, as well as Tasmania showing the largest drop in wages earnings (-9.3%) of the states and territories between the 14th of March and 18th of April.
In the ACT, where employment is more concentrated across public administration, employment and incomes are not as broadly affected.
This could have implications
for housing market demand, where those in secure employment feel more confident about purchasing property.
While the Sydney and Melbourne metropolitan areas broadly have a low workforce exposure to more vulnerable sectors, they do have the largest population of workers in these industries, and pockets of the housing markets will be affected.
Such areas include Sydney’s Inner West where 14.7% of the workforce are in arts, accommodation, food and recreation, and Inner Melbourne, where 11.8% of the workforce were employed in these sectors.
More recently, the ABS unemployment figures released in May showed that almost 600,000 Australians had lost their jobs in April, as the unemployment rate increased from 5.2% to 6.2%.
Concentration of workforce in vulnerable industries before COVID-19 – by greater capital city region
The underemployment rate reached a record high in April, jumping from 4.9% to 13.7% in the month.
In a strange way, this is a good thing.
It suggests that people may have been stood down temporarily, but still are attached to their job.
It suggests those underemployed may be working less, but have maintained their employment relationship due to the JobKeeperscheme.
What is happening to residential real estate amid COVID-19?
In understanding the impact of COVID-19 on the housing market, the CoreLogic research team have approached the topic in a couple of different ways.
The first was to consider how housing has historically performed against negative economic shocks.
On March 17th, CoreLogic circulated an article₄ exploring property value performance against such events.
The research garnered useful learnings about the property market which can inform expectations for the current downturn.
The findings were:
- Negative economic shocks do not necessarily lead to severe declines in property prices;
- Property does not see the same declines as shares during a downturn, because it is used to live in and therefore not as speculated upon as shares; additionally, it cannot be bought and sold as quickly as shares, meaning price movements are not as volatile;
- Due to the temporal nature of the COVID-19 downturn, vendors may hold high expectations for their property value and simply hold off selling until the economy returns to full-scale production;
- The current high level of household debt amplifies the risk of an adverse change in household circumstances such as loss of income, unemployment
or illness on housing market conditions; and,
- The number of property transactions have seen more drastic declines in response to economic shocks, and could be even more affected amid the COVID-19 downturn.
However, it is also important to highlight how the current downturn differs in a number of ways to historic economic shocks.
On the one hand, this is an ‘engineered’ downturn rather than an uncontrollable shock to demand, and the economic fundamentals which were once conducive to the recovery of the Australian economy will look to be resumed once the virus is contained.
On the other hand, unlike the GFC, there is little room for further monetary stimulus.
The COVID-19 downturn began when the cash rate target was 0.75%.
Furthermore, this engineered downturn was brought about amid record-high household debt, driven by high levels of mortgage debt.
A particular concern is that if highly-indebted households lose their income stream, an increase in distressed sales would put downward pressure on property prices.
As an increasing number of lending institutions committed to a period of reprieve on mortgage repayments for up to 6 months, and fiscal policies such as the JobKeeperpayment maintain employment relationships through the crisis, this is perceived as less of a risk.
To understand whether these same dynamics of severe transaction declines and mild value declines were playing out during COVID-19, CoreLogic has been tracking many high-frequency data points, including movement in the daily home value index, metadata around the use of our platforms, and sales and listings activity.
Housing values have shown marginal declines
To date, housing values have only shown a mild slowdown.
By early May, capital city housing values fall by less than half a percent over a month, led by Melbourne, where values are down about half a percent.
This can be seen looking at the rolling 28-day change in the CoreLogic daily home value index.
Towards the end of March, the index started losing momentum, as social distancing and Australian border closures created a shock to housing demand.
One of the reasons values may be holding relatively steady, or only showing marginal declines, is because transaction activity is so low.
Sales volumes fall 40% over April
CoreLogic modelled sales volumes suggest that across Australia, residential property sales declined about 40% over April.
The magnitude of decline was fairly uniform across different parts of the country, and was driven by a decline in consumer confidence.
The chart below shows the Westpac-MI consumer sentiment index against CoreLogic sales volume figures.
It demonstrates the high correlation between sentiment and sales volumes.
Essentially, people are not willing to buy property when they are uncertain about their future income prospects.
This is because property is such a high cost, high commitment decision.
Rolling 28-day change in dwelling values
CoreLogic sales volumes and Westpac-MI consumer sentiment index
The bounce-back in consumer confidence to May was led by news of eased restrictions and low numbers of new reported COVID-19 cases.
This could see a stabilising in transaction activity over May.
But volumes are unlikely to see a full recovery until job and income growth strengthens.
Indeed, there is a long road of challenges to economic demand, and this lift in consumer sentiment may be temporary.
It is not just hesitant buyers that are creating low levels of transactions.
Vendors are also hesitant to sell amid economic uncertainty.
CoreLogic listing data shows the amount of stock available for sale is about 25% lower than it was around this time last year.
The charts below show the new and total ‘for sale’ listings of property across Australia in the 28 days to the 12th of May.
Fresh listings to the market are down 38.2% compared with the same period last year, and total stock was down 26.8%.
The low level of listings signals a tough period for those developing and selling residential real estate.
But it also signals a lack of distressed sales flooding the market.
In other words, not many people are selling, because not many people have to sell.
It is likely that reprieve on mortgage repayments has protected people from distressed sales, at a time of rising unemployment, falling wages and falling numbers of hours worked.
The real test for the stability of the housing market may come in September, when mortgage ‘holidays’ are currently set to expire.
Rent prices are likely to be more affected than property prices
Another pain-point in the real estate market is rents.
CoreLogic recorded a -0.4% decline in rent prices nationally across Australia over April, led by Hobart, where rents declined -1.1%.
Rental markets have been particularly dampened by falls in employment.
This is because jobs have fallen by about a third across accommodation and food services, and arts and recreation services.
These are industries where workers are generally young, on less income, and are more likely to be renters.
While rent values do influence property prices, investment activity has been sustained prior to COVID19, withstanding historically low rental yields across Sydney and Melbourne.
Overall, property prices and transaction activity could be dampened by the current situation.
Property price falls are looking increasingly likely over the June quarter.
Over 2020, our view is that national property value falls beyond 10% seems unlikely at this time.
The direction of the housing market will depend greatly on how quickly the economy can resume full-scale production, but the strength of the rebound has been enhanced by government interventions and an earlier than expected lifting or relaxation of some social distancing policies.
Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on
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