Property market primed to fall – but by how much?

One of the many imponderables arising from the COVID-19 pandemic is the direction for Australia’s property market.

The one thing most analysts agree on is that the market will get weaker but the severity of the downturn is very much a matter for debate as buyers and sellers alike hang back to see what is going to happen.

That lack of both supply and demand – and the practical difficulties of selling during a pandemic – make it even more difficult than usual to predict where the property market is headed.

AMP chief economist Shane Oliver is one of many who sees property prices falling due to higher unemployment, a stop to immigration and rent holidays.

“Home prices are expected to fall by around 5% to 10% into next year from this year’s highs, with the risk of bigger falls if the renewed rise in coronavirus cases leads to a renewed generalised lockdown,’’ said Dr Oliver.

“Melbourne is particularly at risk on this front as its renewed lockdown pushes more businesses and households to the brink.’’

Auction clearance rates low and falling

Another negative indicator is auction clearances with the most recent clearance rate in Melbourne being a very low 45.4% – albeit on thin sales volume.

The inner-city apartment market is looking particularly weak with rents falling sharply and renters able to shop around the growing list of properties available for lower prices and better terms.

Many investors will be feeling plenty of pain – particularly those with large loans – as supply of new apartments also grows at the same time as the international student rental market disappears and some holiday rentals through platforms such as Airbnb return to the traditional rental market.

New apartments coming on to the market amid rental weakness

In Melbourne, global real estate group JLL estimates another 17,950 apartments are under construction within 5km of the CBD while in Sydney 12,200 apartments are still to be completed within 10km of the city.

The picture for houses is probably a little better, with the latest Domain figures showing that Melbourne median house prices had fallen 3.5% in the June quarter to $881,369 – still 6.9% higher than a year ago.

Potential for a glut of forced sales

However, the real acid test for the property market lies ahead when there is the potential for Australia’s property market to be left with a glut of stock as mortgage repayment holidays run out and government salary economic lifelines begin to taper off and run dry.

While most banks are offering special hardship programs and JobKeeper is now flowing into next year – at reduced rates – the COVID-19 pandemic will have a long-term impact on the property market.

The harsh reality is that some people who will not have a job when the dust settles will not be able to pay their mortgage again and will be forced to sell – either by their circumstances or less optimally by the bank following a mortgage default.

It is only when all of these hurried and at times forced sales are flushed through the system that the real picture will emerge and it may not be pretty, given that buyers might struggle to get loan approvals that will support boom time valuations.

Australians can do extraordinary things to stay in their houses

On the positive side, banks have always pointed out that Australians can do extraordinary things to remain in their homes, which is why home loans are regarded as so safe.

On the negative side, mortgage stress is already appearing with figures from Digital Finance Analytics (DFA) showing that 37.5% of borrowing households are in mortgage stress – equating to around 1.4 million households.

Mortgage stress is usually defined as when repayments exceed 30% of a household’s income, however DFA works on the basis of total cash in, cash out.

Of the 1.4 million households, more than 10% are deemed to be in “severe stress” with the probability of defaulting on their mortgage seen as likely within two to three years.

That’s a lot of potential properties coming on to the market which will really be a test of both demand and pricing levels.