Housing Market ‘Collateral Damage’: Westpac


A 10 per cent fall in Australia’s capital city house prices should provide enough of an affordability improvement to kick-start demand, comparable to the correction during the global financial crisis, Westpac says.

But given income growth is likely to remain weak, Westpac economist Matthew Hassan says most of the improvement in affordability must come from lower prices, rather than lower interest rates.

“Despite positive recent news around containment of Covid-19 locally, a near term recession remains assured following a deep contraction in the first half,” Hassan said.

The Reserve Bank of Australia held tight on official interest rates at 0.25 per cent at its Tuesday meeting, adding that Australia’s economy was going through its “biggest economic contraction since the 1930s”.

RBA governor Philip Lowe confirmed that in April, total hours worked declined by “an unprecedented” 9 per cent and more than 600,000 people lost their jobs, with many more people working zero hours.

“Household spending weakened very considerably and investment plans are being deferred or cancelled,” Lowe said in the Tuesday address.

While investor confidence was weak prior to Covid-19, Hassan says this is largely expected to remain so as housing prices adjust, “reinforcing price weakness which could easily extend well into 2021”.

“As to the perennial question of where prices are headed, it’s a mixed but, unfortunately, mostly sombre story,” Hassan said.

“Here, sentiment among investors and affordability are key.”

Commentary20182019202010 Year Avg*
SydneyExposed to tourism/ migration hits and service sector disruptions.-8.94.1-105.1
MelbournePrices more stretched heading into Covid shock, high exposure to tourism/ migration. -74.2-124.3
BrisbaneBetter housing fundamentals; less exposed to migration but tourism and global trade hit.0.21-80.9
PerthLong correction to continue despite low exposure to sectors hit hardest by Covid.-4.7-6.8-4-1.5
AdelaideExisting Covid lockdown early but housing lacks strong demand supports.1.3-0.5-81.5
HobartComing off a strong run and likely to see a more material adjustment as a result.8.73.1-123.3
AustraliaCovid-driven recession hit to incomes and labour market to drive material correction.-6.42.4-103.4

All dwellings, Australia's five major capital cities combined measures *10 Year average. Source: CoreLogic, Westpac Economics.

Monday’s Corelogic figures show Australia’s property prices fell across the state and territory capitals for the first time since June last year, recording a drop of 0.4 per cent over May.

Among the largest falls were Melbourne, down 0.9 per cent, and Perth, down 0.6 per cent, followed by Sydney with a drop of 0.4 per cent.

Its expected the real test will come later this year once stimulus measures start to taper and repayment holidays expire, with almost 430,000 borrowers currently on six-month payment holidays.

The ways in which the pandemic is impacting the housing market is indirect, unlike previous recessions and the global financial crisis, Hassan says this is via household incomes, employment, confidence and migration flows.

“Put another way, whereas property has usually been at or near the front line of cycles in the past, this time around it’s ‘collateral damage’.”

While federal government has tipped migration to fall by 85 per cent, to 100,000. Westpac has slightly higher forecasts, estimating net overseas migration to roughly halve over the next year from around 240,000 a year to 110,000.

“Either way, slower net migration will lower annual population growth to 1 per cent, down from around 1.5 per cent in recent years. That means slower growth in underlying physical demand for new dwellings,” Hassan said.

The Westpac consumer house price expectations index recorded a 50.8 per cent drop in April, before slightly lifting in May, sitting around the weakest levels of the GFC, when prices eased around 10 per cent.

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