Subject of Debate: Is Australian Property Market Recession Proof?

Summary

  • Property market is usually slow to react to economic movements than financial markets, which responds quickly with variation in prices of stocks and bonds.
  • National housing values exhibited a first month-on-month fall of 0.4 per cent since June 2019, with five of eight capital cities demonstrating a plunge in values.
  • Dwelling approvals have been faring well in contrary to market anticipations, as evident from value of residential dwellings approved that improved by 4.4 per cent in April.
  • Auction clearance rates have begun to revive amidst lifting of constraints in multiple cities over the past few weeks.
  • Whether the government’s recent HomeBuilder scheme would boost new home buying activity or would just foster renovation activity need to be watched out for.

While the black swan event of novel coronavirus has been casting dark shadows on global economies and financial markets, the sustenance of Australia’s property market despite stringent lockdown and social distancing regulations has been under scanner.

At the time when speculations of Australia entering into recession are rife, buyers are still hunting for a property, as reflected by surge in total property sales volume in May 2020. Property consultant CoreLogic’s latest data indicated transaction activity rebounded by 18.5 per cent in May, backed by an increase in new home listings.

But does that mean the Australian property market is recession-proof and sailing safe from COVID-19 crisis?

The answer remains debatable as property market is usually slow to react to economic movements than financial markets, which responds quickly with variation in prices of stocks and bonds.

This is evident from property consultant’s Home Value Index results, which demonstrated a stabilisation in housing values in April despite severe weakening of consumer sentiment amidst lockdown restrictions. Moreover, ABS data on building approvals showed a rise in number of residential dwellings approved in April 2020.

While this does not completely rule out chances of the Australian property market to observe drastic declines from COVID-19 driven economic downturn.

With experts keenly eyeing movement of the real estate market amidst the coronavirus-driven market movements, let us quickly scan through emerging trends that may redefine the property space in the near future.

Are Housing Values Sliding Out of Rail?

Property consultant’s May Home Value Index results exhibited a first month-on-month fall of 0.4 per cent in housing values since June 2019, with five of eight capital cities demonstrating a plunge in values.

The largest fall of 1.6 per cent was posted by Darwin during the month, followed by Melbourne (0.9 per cent↓), Hobart (0.8 per cent↓), Perth (0.6 per cent↓), Canberra (0.5 per cent↓), Adelaide (0.4 per cent↓), Sydney (0.4 per cent↓) and Brisbane (0.1 per cent↓).

However, the property consultant notified that national home values stood 8.3 per cent higher than the levels noted same time last year in May, with just Perth and Darwin’s housing values being at less than last year’s levels.

Although negative economic shocks do not necessarily induce severe declines in property prices, Commonwealth Bank of Australia (ASX:CBA) anticipates a 32 per cent fall in property values by 2022 in a prolonged economic downturn and a long period of high unemployment rate.

Nevertheless, CBA Chief Executive has signalled against the high variability of the outlook while indicating that the sector is not expected to see a steep price fall in the near term.

Moreover, the bank expects just 11 per cent fall in housing values over the three years in case Australia observes a V-shaped recovery, noting a fall of 6 per cent in economic growth in 2020, followed by a rapid revival of 6 per cent by 2021 and 3 per cent by 2022.

Residential Dwelling Approvals Holding up Well

Dwelling approvals, particularly residential building approvals have been faring well in contrary to market anticipations. As per the ABS estimates, though the value of total building approved nosedived by 2.5 per cent in April 2020 in seasonally adjusted terms, the value of residential dwellings approved improved by 4.4 per cent.

Moreover, the number of total dwellings approved remained elevated in trend terms, displaying a surge of 1 per cent, with Australian Capital Territory experiencing the biggest increase of 13.2 per cent.

Rises were also recorded in other capital cities, including Northern Territory (10 per cent↑), Tasmania (4.2 per cent↑), New South Wales (2 per cent↑) and Western Australia (2.3 per cent↑).

Although dwelling approvals are offering a glimmer of hope for property market revival, the real impact of COVID-19 on housing is yet to be seen. Some economists do not anticipate the true impact to be reflected in ABS data prior to August or September.

Auction Clearance Rates Stand to Reason

Whilst auction clearance rates bore the brunt of strict social distancing restrictions imposed in Australia, the rates begun to revive amidst lifting of constraints in multiple cities. Amidst the lockdown, auction clearance underwent tech remodelling, as sellers resorted to virtual auctions that allowed the market to witness significant activities.

Property consultant’s latest statistics reveal auction clearance rate was at 56.2 per cent in the first week of June amidst lower homes scheduled for auction due to long weekend, which welcomed Queen’s birthday. Moreover, the data showed that rate of withdrawn auctions has stabilized with considerably smaller number of auctions being withdrawn over the past few weeks.

Government’s HomeBuilder Package: Beacon of Hope?

From RBA to OECD, everyone has been stressing on importance of government’s fiscal stimulus to stimulate revitalization of the Australian economy.

In order to provide support to the residential construction market, the federal government recently unveiled a HomeBuilder scheme worth $680 million targeted at encouraging the initiation of renovations and new home builds in 2020. The scheme is expected to enable residential construction market to rebound from COVID-19 crisis.

It involves a grant of $25,000 to eligible owner-occupiers (comprising first home buyers) to significantly renovate an existing home or build a new home between June and December end. Whether the scheme would boost new home buying activity or would just foster renovation activity need to be watched out for.

In a nutshell, while property market so far tends to demonstrate some resilience in the face of COVID-19, it will be too early to say that it’s all bearish or bullish for market in the long-run as it depends on the economic health at a broader level. Restoration of business operations spurred by economic reopening may give a firm nudge to the real estate sector.


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