Property prices yet to see full scale of COVID-19 pandemic's impact: economists

Property markets around Australia are yet to see the full scale of the coronavirus crisis’ impact on prices, according to economists, as stimulus measures soften the blow.

In the early days of the COVID-19 pandemic’s arrival, initial forecasts for property price drops ranged from 10 per cent to 15 per cent.

Five months on and most believe prices are running their course as first forecast but some banks have revised their predictions up for smaller cities and down for major centres, notably pandemic-hit Melbourne. 

House prices fell just 2 per cent nationally in the June quarter, with a 2 per cent drop in Sydney and 3.5 per cent in Melbourne, the Domain House Price Report found.

The drops have so far been cushioned by federal government stimulus payments and mortgage holidays on offer from lenders.

ANZ Bank has maintained its forecast for national house prices to fall by 10 per cent from peak to trough but now expects smaller falls in Hobart, Brisbane, Adelaide, Perth and Canberra.

While all those cities are set to fall between 6 and 9 per cent, the bank revised its forecast to a 15 per cent drop in Melbourne house prices, a dip greater than its previous prediction of a 13 per cent fall.

It still predicts a 13 per cent fall in Sydney, bottoming out in the second half of 2021. 

But NAB Group chief economist Alan Oster said his July outlook remained unchanged from the predicted 10 to 15 per cent drop in national property prices.

“We’re basically expecting peak-to-trough to fall somewhere between 15 per cent,” Mr Oster said. “Think about another year of 1 per cent falls a month.”

He said property prices in rural Australia might outperform their metropolitan counterparts but it was too early to judge.

“It’s just too early to see if people are going to be working from home [in the long term]. The premium for living close to the CBD might disappear, or it might not be as strong,” he said.

Mr Oster was not confident Perth property prices would hold up better than other areas.

“You’ve got unemployment everywhere … Perth is the only capital city where the level of houses in dollar terms is even now below where it was in 2007 so there has got to be a lot of negative equity,” he said.

“They have been doing OK in terms of the economy but you can’t say the same for house prices.”

Mr Oster said overall household cash flows seemed stable for now but it was unclear whether it was buoyed by the now-extended mortgage repayment holidays and government stimulus.

“It’s a chicken and egg situation,” he said. “We’ve talked to all our deferred loans and a substantial chunk of them are OK.”

Meanwhile the Commonwealth Bank of Australia is still expecting house prices to drop at least 10 per cent to 12 per cent from peak to trough.

The bank earlier this year conducted scenario modelling of how its business would handle a worst-case 30 per cent fall.

Reserve Bank of Australia researchers also published stress tests last week, measuring how sensitive indebted households would be to the shock of any sharp fall in house prices. They modelled  a 40 per cent fall in house prices which the bank called “an extreme but plausible scenario”.

EY chief economist Jo Masters said while that was an unlikely scenario,  the price declines had some way to go yet.

“History tells us never say never,” Ms Masters said, adding that the paper also argued that there was a long-term shortage in apartments in Australia.

She said even a small rise in latent demand from population growth and first-home buyers would see a big improvement in property markets on the eastern seaboard.

But ultimately, the extended mortgage repayment holidays and government stimulus measures were in effect slowing the drop in property prices, Ms Masters said.

“While we see house prices come off, they’re not collapsing. The stimulus put in its place is doing its job,” she said. “The net transfer income from government to households, it’s extraordinary.

“It’s likely household disposable income rose in Q2,” she added. “Effectively it tells you the hit to housing demand from job losses and weak income growth is ahead of us not behind us.”

HSBC economist Paul Bloxham said the bank’s outlook was never as downbeat as others and it remained on track.

“Our view on the housing market hasn’t really shifted in the past few months. We were never as downbeat as other observers,” Mr Bloxham said, adding that Sydney and Melbourne would be hardest hit due to border closures.

“As a broad principle, the smaller states are going to lead Australia’s economic recovery and that they’re less exposed to the impact of the closure of international borders.

“It’s a slow moving decline and in part that’s because of the repayment holidays.”

BIS Oxford Economics executive chairman Robert Mellor said it was unlikely that banks would foreclose despite the declines.

“It will run further than we would have expected in March. We thought of a fairly immediate decline of 10 per cent in the June and September quarter,” he said. ”Instead of a quick and fast decline, it has spread over a 12 to 14-month period.

“Prices are down 2.5 per cent in Melbourne – it’s not a collapse. I don’t think it’s worse than we’d expect.”