Housing markets brace for ‘tricky’ territory, but a rapid snapback could be on the cards

For now, telling whether underlying conditions are hot or cold “is going to be exceedingly difficult”, Westpac’s senior economist Matthew Hassan said. But while thin trading is expected to lead to weaknesses in the near term, Mr Hassan believes a rapid snapback is on the cards once restrictions ease across the country. As such, while prices are predicted to see a loss of momentum, “outright declines look unlikely”.

“On balance, we expect the situation to see a temporary loss of momentum rather than a correction in the most heavily impacted areas, and a rapid snapback once restrictions ease,” Mr Hassan said.

But for Mr Hassan, COVID considerations could take a back seat, as surging prices and stretched affordability shake the markets.

“Thin trading means some sub-markets will be more susceptible to weakness near term, particularly where economic pressures are intense and the virus outlook uncertain. However, thin trading also means even lower ‘on-market’ supply that could be a bigger issue once activity rebounds,” he noted.

According to the Westpac Melbourne Institute, the ‘time to buy a dwelling’ index dropped another 14.1 per cent over the three months to August, after a similar decline over the previous three-month period, signalling that deterring affordability is starting to bite.

That is not to say that the effects of the latest delta-induced lockdowns are to be discounted.

With the delta outbreak set to hit the wider economy hard near term and result in a contraction of activity by 2.6 per cent in the third quarter, Westpac believes the future is riding on vaccination rates.

And while the bank’s central case view is that lock-down measures will remain in place in NSW through to the end of October and that Victoria will have restrictions through to early September, “much will depend on the course of both the outbreak and vaccinations between now and then”, as well as how policymakers view the balance of health risks.

As for delta’s impacts on property to date, Westpac noted that while market activity shows big swings, “prices look to be less affected”. The bank put this down to consumer sentiment, noting that if disruptions are seen as temporary, and medium-term prospects are viewed as positive, then prices are much lees likely to be affected.

Admitting that this notion will be tested as lockdowns drag on, especially as household finances become more stressed, Westpac said the availability of vaccines provides “fundamental support to medium-term expectations”, that is, that prices will “remain well anchored”.

Moving on to interest rates, Westpac is confident that standard variable mortgage rates will remain unchanged “for a long time”, with official rate rises not expected until 2023.

Noting that the “COVID situation” has become the “overriding” issues for the Reserve Bank since June-July, Westpac still expects some tightening in prudential policy “around the middle of next year”.

“With affordability stretched, this is expected to see a sustained slowing in price growth before the start of a modest correction as interest rates start to rise in 2023,” the big four added.

All in all, Westpac puts the growth in dwelling prices at a record 18.1 y/y per cent in August, with locked down Sydney leading the pack with extraordinary 21 per cent growth.