Commonwealth Bank wins the battle of the coronavirus horror stories, predicts housing prices could fall 32%

Commonwealth Bank coronavirus Australia prediction property housing prices fall
Australia's big four banks are predicting housing prices could fall around 11-32% by 2022.

You could have easily been mistaken in believing that Australia’s big four banks have been trying to outdo each other with horrifying predictions.

With the Commonwealth Bank (ASX: CBA) outdoing all of the others with its “worst case’’ forecast that house prices could fall by an amazing 32% by the end of 2022.

It was far from alone with this sort of scenario – National Australia Bank (ASX: NAB) also ran a prediction, which assumed a fall of about 30% in property prices.

Westpac (ASX: WBC) had a “base case’’ scenario which assumed a 15% slide in house prices this year and another 5% decline next year.

Not to be left out, ANZ (ASX: ANZ) used a “base case” forecast which assumed a 4.1% decline this year and a 6.3% fall in 2021.

Scary stories share a purpose

It may look like the banks are trying to outdo each other with pessimism but, in reality, these sorts of predictions are vital in banking, which is a highly leveraged business that always needs to assume the worst and hope for the best.

When bad loans start to mound up and property prices reverse strongly, even a well-capitalised bank can suddenly look cash strapped.

Commonwealth’s base case scenario would see the Australian economy shrinking by 6% this year, before bouncing back with 6% growth in 2021 and growth of 3% in 2022.

That would entail a cumulative fall in house prices of 11%.

Commonwealth’s most pessimistic scenario showed the economy shrinking by 7.1% this year and 0.8% in 2021 before a weak recovery of 2.3% in 2022.

This would produce the average 32% fall in house prices.

More than $65 billion in loans on pause

Let’s look more closely at what is actually happening at Commonwealth so far as it deals with the economic carnage caused by the COVID-19 pandemic.

The bank said it had received repayment deferral requests on about 71,000 business loans worth more than $15 billion, 144,000 home loans worth $50 billion and 25,000 personal loans.

The open question is what happens when those payment deferrals come to an end in September and that is a scenario that is very difficult to predict given the unusual nature of the COVID-19 pandemic which has stalled so much of the Australian economy.

Commonwealth chief executive officer Matt Comyn described that outcome as “very difficult to forecast’’.

“We entered into a six month repayment deferral, at the three month mark we will communicate with our customers to understand what their current economic circumstances are and clearly for those who are able to return to work and who can start repaying their mortgage then we would encourage them to do so,” he said.

Constrained supply helping housing market – for now

There are some encouraging signs within the housing market with many vendors withdrawing their properties from sale until the air clears and auctions and house inspections return to a more normal pattern.

That is preventing a rapid drop in prices because there is no great number of unsold properties weighing down the market but the real test will be where unemployment lands after the crisis and particularly when the Federal Government’s Job Keeper and Job Seeker stimulus payments end.

Provisions tell the story

Perhaps the most accurate way of looking at the problem is through the prism of the provisions the banks have made to cover losses from the COVID-19 recession.

Commonwealth as the largest bank has set aside the most at $1.5 billion, which takes total provisions for bad and doubtful debts to $6.4 billion.

The other three banks have set aside similar proportionate amounts to produce a total of COVID-19 provisions of around $5 billion.

These are the amounts the banks think will be needed to have on hand to deal with the slew of loans that turn bad and obviously these numbers can go further up or down if circumstances change.

That, in turn, depends on the progress Australia makes with fighting COVID-19.

Control of the virus holds the key

If we manage to keep the virus under control with only limited outbreaks and workplaces begin to return to some sense of normality by June or July, then maybe even the base cases the banks have assumed will turn out to be pessimistic.

However, if there are rolling disease outbreaks that lead to an ongoing cycle of lockdowns for the rest of this year or even longer, then even the most pessimistic scenarios from the banks could turn out to be wishful thinking.

There is so much we don’t know about the long-term behaviour of this virus and with the production of any vaccine – if indeed one can be produced – quite a way into the future, this sort of uncertainty will be with us for some time.

However, the tidings for property prices have certainly taken a turn for the worse, which is something of a rarity in Australia’s recent history.