How COVID-19 could make it easier for you to buy a home

The coronavirus has rocked Australia’s economy significantly, but there are signs that first-home buyers could benefit. 

Australia recorded its biggest quarterly fall in economic activity this week, but this has not yet translated to a major property market crash, and is not expected to, according to AMP Capital chief economist Shane Oliver.

“It’s not our base case that this will come in the form of a property crash (and that would be a bad outcome for the economy anyway via negative wealth effects), but it could come in the form of much softer property price gains over time after the initial hit into next year,” he said.

The housing market is losing steam, with prices across the nation creeping down by 1.7 per cent in the three months to August, the latest CoreLogic figures showed. 

Melbourne’s property market suffered in particular, as the ongoing lockdowns impact the market. Melbourne housing values fell by 4.6 per cent during the COVID-19 period, while capital city markets declined by 2.5 per cent.

JobKeeper and the mortgage repayment holidays, which will taper or end for many this month, are helping the housing market dodge bigger price drops. But Mr Oliver said it was likely for prices to plunge further, due to high unemployment, a weak rental market and the immigration downturn.

He expects average capital city prices to fall by between 10 and 15 per cent from the market’s April high until mid-2021. Melbourne is tipped to be most at risk, and housing values there are likely dive by 15 to 20 per cent.

Working from home

With many people transitioning to working from home long-term, this could potentially have a flow-on effect on housing prices.

If a mix of working in the office and from home becomes the new normal, as widely predicted, this could see a major shift in the types of properties in demand from home buyers.

While pre-pandemic, the trend towards apartments in metropolitan areas was clear, but COVID-19 and working from home could ramp up demand for spacious properties such as houses away from the city.

“(This) will mean less demand for property close to the CBD, greater demand for property in suburbs, with a decent community and environment and increased property demand in regional centres,” Mr Oliver said.

He added that it was possible that some office and retail properties affected by the pandemic could be converted to residential properties, which may help boost development and housing supply. 

“By fostering decentralisation, a shift away from cities to regional communities could dramatically improve housing affordability over time,” he said.

Unemployment

While there’s the possibility that the property market could bounce back after the pandemic is controlled, some fundamental shifts in certain industries – including travel and tourism as well as an upward trend in e-commerce – could point towards “a long tail of unemployment”, according to Mr Oliver.

“Officially measured unemployment is still likely to hit 10 per cent by year end and will probably have only fallen to around 9 per cent by end (of) 2021,” he said.

“This will likely result in more forced property sales and act as a drag on home prices, as income support measures and the bank payment holiday wind down.”

Reserve Bank of Australia (RBA) analysis has indicated that for every 1 percentage point increase in the unemployment rate, the mortgage arrears rate generally climbs by about 0.8 percentage points, according to the central bank’s April 2020 Financial Stability Review. 

Immigration

One of the biggest drivers of the rise in housing values has been overseas immigration, but travel bans have delivered a severe beating to net immigration numbers. It is anticipated that low permanent migration could have a strong impact on demand for residential property. 

“This could result in a significant oversupply of dwellings, and in turn could reverse the years of undersupply that has maintained very high house prices since mid-last decade,” Mr Oliver said.

“Of course, if this is just for a year, it wouldn’t have much lasting impact. And the return of expat Australians may provide a short-term offset.”

Mr Oliver noted that even when it becomes safe to push immigration back up, it could be difficult for this to recover given high unemployment and relatively few work opportunities.

“This points to a long period of constrained housing demand and hence more constrained house prices,” he said.

Low interest rates

The RBA held the official cash rate at 0.25 per cent this week, nearly half a year since the central bank cut the rate to a record low in March due to the pandemic. 

The coronavirus cash rate reduction has had an impact on interest rates offered by mortgage lenders on the market, meaning it could be cheaper for some buyers to borrow money to purchase a home now.

The average interest rate on the RateCity database for those living in their own home fell to 3.26 per cent in September from 3.71 per cent pre-coronavirus in February, representing a fall of 46 basis points.

If someone took out a 30-year, $400,000 loan this month on the average interest rate of 3.26 per cent, they could potentially be paying $100 less per month than someone who took out an average-rate loan in February, equivalent to about $1,200 a year in savings, according to RateCity’s analysis.

Source: RateCity

The decline in home loan rates across the board have prompted nine lenders to bring their rates below 2 per cent, with the lowest at 1.90 per cent (comparison rate 2.39 per cent), coming from Reduce Home Loans.

Some of the lowest mortgage rates on RateCity

Some of the lowest mortgage rates on RateCity

Source: RateCity

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