It’s official. COVID-19 restrictions have pushed Australia into recession – unemployment is rising, people are spending less, businesses are firing instead of hiring and economic output is falling.
Despite this, and contrary to many early predictions, house prices are not plummeting. In fact, in every capital city except Darwin, prices are now higher than they were a year ago.
Why is this the case and what could turn it around? There are six key reasons why house prices aren’t plummeting, yet.
6 reasons why house prices haven’t plummeted during COVID-19
1. Banks are being supportive
Well-capitalised banks with the ability to offer six-month mortgage payment freezes have been a key factor in supporting struggling home owners through the pandemic and preventing price declines. The loan holiday period expires this month meaning those people who are able to start repaying their loans will be expected to do so, although those who still can’t pay their mortgage will be given an extension.
Right now, we are seeing very few mortgagee sales on realestate.com.au, with just two distressed sales out of more than 160,000 listings available in Australia, mainly due to loan repayment freezes. But if banks stop supporting virus-hit home owners, mortgagee sales would likely increase dramatically causing house prices to tumble.
Why would banks withdraw support? For now, their focus is on managing risk, but if the current problems with productivity morph into a financial crisis, the banks would likely have no means to support mortgage holders. This would be very bad news for the economy and tumbling house prices would only be part of the fallout.
2. Unemployment is hitting renters
Unemployment is rising and the most recent data from the Australian Bureau of Statistics has it sitting at 7.5%, Australia’s highest unemployment rate since 1988. At this stage, younger people have been hardest hit with job losses, primarily those employed in travel, hospitality and education. If previous recessions are anything to go by, this trend will continue. Youth unemployment hit 20% in the last recession and it has already reached 16.4%.
The rapid rise in unemployment among younger people has hit the rental market very quickly. Rental listings – also aided by a rise in short-term holiday listings becoming long-term residential listings – increased dramatically on realestate.com.au in the months after the health crisis, causing rental prices to drop. While the increase has eased significantly, it is leading to problems in some suburbs.
3. Risk is highly concentrated
Rental listings are no longer rising in the same way they were early in the pandemic, but there are problems in 10 suburbs, which now account for half of all increases in rental listings since the first round of lockdowns. These suburbs are highly exposed to renters and most are close to universities.
For investors in these suburbs, many are struggling to find tenants or are experiencing a significant drop in rental return. With price growth minimal and concerns about future growth, it appears many are looking to sell out. The biggest increases in apartments for sale are now in high-development areas, many of which are also seeing big increases in rental listings.
4. Parts of the economy are doing well
Despite the recession, not every part of the economy is struggling. For example, the mining sector is giving Western Australia and Queensland a big boost, while strong employment in federal government services is a boon for Canberra.
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As a result, Perth is seeing strong buyer demand on realestate.com.au and Queenslanders are the most confident buyers and sellers in Australia. Meanwhile, Canberra house price growth has not stopped for a single month since mid-March.
5. Employed people aren’t spending as much
For now, the majority of well-paid, white-collar professionals have escaped job losses, but the recession is making them nervous and households are currently saving nearly 20% of their disposable income, compared to 6% in the first quarter of 2020.
While people are saving more, safer conditions among well-paid job types is also good news for premium property markets. We are yet to see tough house price conditions emerging in Australia’s most expensive suburbs, with many of them continuing to see price growth through the pandemic.
6. Stimulus is helping
Record levels of government stimulus, such as JobKeeper, are helping keep house prices steady. While this is generally helping the unemployment rate and the stability of our banks, policies targeting home buyers such as the 5% home loan deposit scheme, state government first-home buyer incentives and the recent HomeBuilder grants are ensuring a steady flow of demand into housing.