ANZ: House prices may fall 10%

Weakening household income, reduced population growth and subdued demand will depress the housing market by 10%, according to ANZ. The forecast, which is a revised version of the bank’s January forecast of 8% dwelling price growth expectations, is a sharp reversal — a fall of almost 20%. The renewed outlook mirrors CBA’s mid-April forecast of a 10% plunge along with UBS, who are similarly predicting a 10% decline in house prices in its “full-pandemic scenario”.

ANZ now predicts house prices to fall across the country. Sydney and Melbourne are expected to fall the most at 13%, followed by falls of 7% in Brisbane and Darwin, and a 6% fall in Adelaide. ANZ expect Canberra to be cushioned by the high proportions of government workers, with a fall of only 5% expected. Perth is expected to come out of this period in the best position, with a decline of just 2% expected over the next two years.

“We anticipate prices will bottom out in mid-2021 as affordability improves, but the recovery is likely to be relatively gradual given that unemployment is expected to remain above 7 per cent until 2022,” ANZ senior economist Felicity Emmett said.

ANZ also expects unemployment to rise to just under 10%, the highest since the early 1990s recession. To date, nearly a third of Australian households have reported a deterioration in their finances due to Covid-19 and analysts expect that number to grow.

“This collapse in income will create significant uncertainty for households and leave many unwilling to commit to buying or building a home,” Emmett said.

Emmett noted that markets heavily reliant on sustained population growth such as Sydney and Melbourne were likely to experience the steepest declines as a result of the border closures. The federal government estimates that Australia’s net overseas migration is set to fall by more than 85% in 2020-21.

With the rental market under pressure from both reduced demand and increased supply, the incentive to invest in property is expected to remain low for some time.

“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,” Emmett said.

As a knock on, ANZ expects housing construction, which had already been falling since mid-2018, to take a substantial hit from pandemic shutdowns. Construction activity is projected to decline another 15% through 2020-21, bringing the cumulative peak-to-trough decline to 25%. If that was to occur, it would mark the largest decline in construction since the 34% collapse in activity in the wake of the introduction of the GST in 2000/2001.

“Housing construction took more than 0.5pp off growth in the year to December 2019, and looks set to continue to be a drag on growth” Emmett said. “The uncertain income outlook and the sharp reduction in population growth will curtail demand from both owner occupiers and investors. We expect construction activity to continue to fall through 2020, bottoming out in mid-2021 before turning higher.”

Written: 11 May 2020

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