The property ‘cliff’: Will property prices fall from September?

Predictions from the banks and industry have varied widely. The Commonwealth Bank has predicted a worst case scenario where house prices could fall by almost a third by the end of 2022. Under a more optimistic scenario house prices could fall by 11 per cent.

NAB’s worst case scenario similarly predicts a 30 per cent drop by 2021. Westpac’s base case scenario anticipates a 15 per cent fall in house prices in 2020 and a further 5 per cent fall in 2021 and ANZ’s base case scenario predicts a 4.1 per cent decline in 2020 and a 6.3 per cent decline in 2021.

HSBC is predicting house prices to fall in by 2-12 per cent in 2021 and AMP Capital's Shane Oliver has forecast prices to fall as much as 20 per cent. 

Clear as mud, right?

To add to the confusion, so far any price falls have been mostly modest. According to CoreLogic, in May property prices only fell by 0.42 per cent in Sydney and 0.91 per cent in Melbourne compared to April. In some markets property prices actually grew in that period, including in Brisbane and Adelaide. 

A number of factors may be behind why house prices haven’t fallen significantly to date. Many markets across Australia continue to have low supply with potential sellers withdrawing from the market and demand remaining strong.

The JobKeeper payment, the doubled JobSeeker payment and an increase in mortgage deferrals have also reduced the immediate financial stress on households, meaning we haven’t yet seen forced property sales due to unemployment. These factors have done a good job of keeping the property market stable, but this may prove to be short lived.

Come the end of September, several significant changes will occur. These changes could potentially create a perfect storm, driving up unemployment and leading to forced property sales, which could cause a drastic fall in property prices. But will this worst case scenario actually come to fruition?

Mortgage deferrals to end while mortgage stress is on the rise

Approximately one in 10 households have deferred their mortgage repayments.

According to the Australian Banking Association, as of 19 June, a total of 779,458 loans have now been deferred, valued at $236 billion.

The number of Australian households in mortgage stress has increased to 1.42 million or 37.5 per cent of all households. 

Keep in mind that any interest not paid during a mortgage deferral is added to the outstanding loan balance through interest capitalisation. The loan balance will be bigger than it was prior to the deferral, which is a backwards step towards paying off the loan.

The numbers are certainly concerning but the good news is that discussions are underway between the banks and regulators as to how to best support households which have deferred their mortgage repayments once the deferral period draws to a close.

Unemployment could grow once JobKeeper ends

The unemployment rate reached 7.1 per cent in May. 227,700 jobs were lost, following 607,400 job losses in April, bringing the total to 835,100 jobs lost since March. 211,000 of those are now considered unemployed with over 600,000 having dropped out of the workforce altogether.

If we include those who have left the workforce, the unemployment rate would be closer to 11 per cent, which is a more accurate picture of the current conditions. $1.6 million Australians are receiving the JobSeeker payment which extends to those Australians out of work but not actively looking for work. 

The unemployment numbers don’t account for the 3.5 million Australians receiving the JobKeeper payment. The JobKeeper scheme provides a $1,500 payment per employee for businesses which have experienced a downturn of at least 30 per cent as result of the COVID-19 pandemic.

Unless the federal government decides otherwise, JobKeeper payments will end on 27 September.

There has been some suggestion that JobKeeper could be extended beyond September for the industries most in need. Outside the Sydney CBD and Melbourne CBD, manufacturing hubs Liverpool (NSW) and Hoppers Crossing (Victoria) have received the most JobKeeper payments, followed by tourist hotspot Cairns (Queensland).

This could indicate the industries where stimulus may flow if JobKeeper is extended. 

It remains to be seen how many of the 3.5 million receiving JobKeeper now may find themselves unemployed come the end of September. In a worst case scenario, unemployment could worsen significantly. However, better than expected consumer confidence and business confidence results of late could indicate otherwise. 

What can investors expect?

In the short-term, conditions have been more difficult for investors, however, those with a long-term view will prevail.

Overall investor participation has declined in every state except South Australia, and the ACT. Investor lending also dropped 2.5 per cent in March, reflecting tighter lending restrictions and a reduced appetite for investing. 

In some markets, rents have fallen. In suburbs which previously had a lot of short-term rental stock available to rent via services like Airbnb, many of those investors were forced to find long-term tenants once the short-term rental bans were enforced which flooded properties onto the market. The demand couldn’t keep up with the added supply, causing rents to drop.

The same situation has also occurred in suburbs which usually have a high proportion of international students.

According to CoreLogic, rents are down 0.2 per cent from the recent peak in March 2020. Many investors have had to negotiate rent deferrals or reductions with tenants in economic hardship and the six month moratorium on evictions has added new pressures.

Rising vacancies and falling rents have been compounded by low capital growth. 

According to CoreLogic, house prices in the capital cities dropped by 0.5 per cent throughout May. 

The conditions have caused some investors to opt to sell up. The withdrawal of investors could cause a further drop in property prices, especially for investment-grade stock like apartments. For investors wanting to sell, days on the market have increased as has vendor discounting, which could further impact median prices.

The good news is that while yields have been trending downward, in May rental yields recovered by 3 basis points. There continues to be opportunities for investors, with supply at record lows and demand strong in certain suburbs. Areas which will benefit from First Home Buyer incentives and where incomes and jobs have been less impacted by the economic downturn will remain attractive to investors and will withstand any potential deeper price falls from September. 

What can upgraders expect?

For those looking to upgrade to a bigger or better home there will be opportunities.

Upgraders should seek out advice from their mortgage broker to assess their situation. Will they need to sell in order to buy? Is there an opportunity to hold onto their principal place of residence (PPOR) and turn it into an investment property? The situation will vary for every upgrader depending on what they can afford and whether there is a strong enough rental market for their PPOR.

In any event, falling property values will allow for upgraders to access better homes. Steeper falls will lead to better discounts, but will also affect those opting to sell their PPOR. Record low interest rates are also making purchases much more affordable.

What can first home buyers expect?

For those looking to buy their first home, government incentives, record low interest rates and falling prices will provide opportunities.

The First Home Owner Grant (FHOG) scheme is a national scheme funded by the states and territories which provides a one-off grant to first home owners that satisfy all the eligibility criteria.

Do your research into how these grants are applied in your state or territory as well as into any other incentives such as stamp duty concessions. Other incentives such as the HomeBuilder scheme are also making it easier for first home buyers and others to build, so this may also be an option.

If property values continue to drop this will make it easier for first home buyers to enter the market. First home buyers should focus on saving as much as they can for a deposit. For those whose incomes and jobs haven't been impacted by the current economic conditions, they may actually find they are saving more than ever before. The higher the deposit, the lower the loan to value ratio (LVR) which may potentially allow you to avoid lenders mortgage insurance.

Speak with your mortgage broker to assess how much you will need to save, what repayments you can afford and how various scenarios may affect your home ownership prospects in the next couple years. If rates fall again or remain steady, this can provide good opportunities for first home buyers.

What’s next?

It’s clear that there is a lot of conflicting information out there about whether property prices will fall and by how much. Mixed messages particularly by those with vested interests, have added to the confusion for investors, upgraders and first home buyers and could be clouding people’s judgement.

Ultimately, no one has a crystal ball. All we know is that September is a potential danger zone, but if certain conditions come to fruition we may be cushioned from the very worst impacts. Continued government intervention and mortgage relief may prevent big rises in unemployment. This will prevent forced sales and steep rises in supply.

It’s also important to remember that not all markets in Australia perform the same way. There are markets within markets which perform differently. In many areas supply remains low and demand is still strong keeping prices buoyant.

If we do experience deep price falls come September, some properties and markets will be more affected. Lower quality properties, such as apartments in larger developments targeted at investors, are most likely to experience the steepest falls. However, higher quality homes and investment grade properties may only fall by about 5 per cent. Average homes could fall by around 10 per cent.

The best advice at this stage is to not panic and watch the market closely. Should you decide to buy, undertake extensive research into the area and type of property, talk to your mortgage broker about what you can afford and run various scenarios to assess how that decision will affect you in the short, mid and long term.

By Aaron Christie-David, managing director, Atelier Wealth