How low could house prices actually go?

According to the portfolio manager, current housing figures have been “remarkably resilient” given the circumstances surrounding the COVID-19 crisis, given they’ve only fallen by around 1 per cent in the past three months.

This is despite “some of the worst economic conditions Australia has seen in the past 70 years”, Mr Rands stated.

“Most forecasts in the market suggest there will be continued declines to come, but of a magnitude that is not dissimilar to 2019,” he continued.

Having analysed auction clearance rates, mortgage finance and building permits for new homes, the portfolio manager said: “In the short term, all three indicators are pointing to the same outcome: house price declines of approximately 5 to 10 per cent, which could be towards the lower or higher end of that range depending on which indicator is preferred.”

According to Mr Rands, it means investors should be, at the very least, mildly concerned.

“Yet this outlook only reflects what is already known (and observable), providing only a three- to six-month outlook without making much reference to what could be in store in 12 months’ time,” he conceded.

“Currently, Australia is facing its worst economic performance in 70 years with very little room for rates to fall. So, we must also think about how these indicators could move in the bigger-picture environment.”

Bigger-picture drivers include unemployment, the presence of fiscal stimulus (JobKeeper and JobSeeker), immigration and population growth, and the continuing record-low interest rates.

From the portfolio manager’s perspective, these big-picture drivers are split into three broad categories: the “good”, the “bad” and the “it depends”.

He’s lauded the Reserve Bank of Australia’s swift action as “good”, saying: “With interest rates falling a little over 1 per cent over the past 12 months, housing becomes more affordable.”

If all else were equal — which definitely is not — Mr Rands said prices would be set to rise more than 15 per cent from their mid-2019 levels, meaning this proactive action will stave off some of the more negative outcomes.

Falling into the category of “bad” is high levels of unemployment and seriously low levels of immigration, which point to weaker housing demand.

The portfolio manager explained that Australians who have lost their job will be far less likely to buy (and could become sellers), while the lower population growth means fewer people will now require new housing within the next 12 months.

In the “it depends” category, Mr Rands has placed fiscal support and loan deferrals.

“At the moment, unemployment benefits are two to three times higher than they usually would be and close to 500,000 borrowers have had their payments deferred,” he said.

“The fact that these benefits have been extended, albeit at lower amounts, means some of the more negative outcomes may be avoided (or simply delayed).”

However, the portfolio manager did raise concern about the reduction in the size of unemployment benefits, stating it would create “a far harsher environment for those who have been affected economically”.

Coming back to the question of “how worried should we be?”, Mr Rands said the answer to the question, at the moment, “falls on government support and just how long it will last”.

“Depending on how these support measures are changed, there is good reason to believe that the negatives will continue to outweigh the positives over the next 12 months as the expansionary policies are slowly unwound,” he said.

What does this mean?

According to Mr Rands, it means house prices could fall further than the forecast 5 to 10 per cent that most expect over the short term and into the 10–20 per cent decline range.

“That certainly calls for more concern than the short-term indicators would suggest,” he concluded.