Pandemic lays housing recovery low

ANZ Research expects prices and construction to fall through the balance of 2020 and into 2021, before a modest recovery in late 2021.

" The collapse in demand in the face of the extremely uncertain outlook will drive prices lower over the next year or so.”

The deterioration in household income will be the biggest driver of weakness. Already, nearly a third of Australian households have reported a deterioration in their finances due to COVID-19. This collapse in income will create significant uncertainty for households and leave many unwilling to commit to buying or building a home.

While the deferral of home loan repayments will help prevent forced sales, the collapse in demand in the face of the extremely uncertain outlook will drive prices lower over the next year or so.

For house prices, ANZ Research expects a peak-to-trough decline of 10 per cent on average across the capital cities, with the sharpest falls in Sydney, Melbourne and Hobart. ANZ Research expects the Perth market to perform the best with a decline of just 2 per cent expected. Prices in Brisbane, Darwin, Adelaide and Canberra are all expected to fall solidly.

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Falling population growth

Australia’s closed borders will limit new arrivals and remove the largest source of population growth. Net overseas migration currently accounts for around 240,000 people or nearly two-thirds of Australia’s population growth.

The Federal Government estimates Australia's net overseas migration will fall by more than 85 per cent in 2020-2021 (from 2018-19 levels) due to international travel bans instituted in response to the coronavirus.

This drop in population growth will remove a major driver of economic growth and housing demand, at least for a period.

Sydney and Melbourne are the key markets likely to be affected by the cut-off of overseas migration. In the year to June 2019, Sydney’s population grew by 87,000 with 85 per cent of those newcomers being overseas migration. In Melbourne, the numbers are also significant with 77,000 overseas migrants accounting for 68 per cent of the total population growth of 113,000.

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Collapsing rental markets

Vacancy rates are set to rise sharply over coming months, with the rental market likely to be even harder hit than the new home market.

The number of rental properties coming onto the market has increased sharply. Short term rentals such as those for Airbnb are switching to longer term leases; potential vendors are withdrawing their properties for sale and listing them for rent; the overseas student market has dried up; and the sharp reduction in incomes is potentially driving younger renters back to live with their parents.

CoreLogic reports rental listings have risen sharply, particularly in inner Melbourne (+36 per cent in the month to 26 April) and Sydney (+34 per cent).

As a result, advertised rents have started to drop in major cities. Asking rents dropped 0.7 per cent month-on-month in April, the largest monthly fall in the history of the series.

Alongside still-elevated levels of completions of new high-rise apartments, particularly in Sydney, these factors suggest vacancy rates and residential rental yields will decline further over the next year or so.

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Construction is set to fall sharply

The uncertain income outlook, as well as the sharp reduction in population growth, will curtail demand for new homes from both owner-occupiers and investors.

The likely pullback in investor demand, given very challenging conditions in the rental market, will also weigh on the outlook.

We are already seeing a decline in both the ANZ-Property Council Australia survey construction index and the collapse in the Ai Group new orders index.

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Housing construction is already down 12 per cent from the peak in mid-2018. ANZ Research expects activity to continue to contract over the next year, bringing the total peak-to-trough decline to 25 per cent.

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This would be the largest decline in construction since the 34 per cent collapse in activity in the wake of the introduction of the GST in 2000-01.

Felicity Emmett is Senior Economist and Adelaide Timbrell is Economist at ANZ