A big four bank believes the fall in the housing market will be half as bad as originally projected, claiming they’ll overcome a sell off of defaulting properties to return to growth much quicker than expected.
Westpac is walking back its projection that the property market will experience a 10 per cent fall by June next year as the economic fallout from the COVID-19 coronavirus isn’t as bad as anticipated.
A fall half the size is now forecast to take place across the country instead, the bank’s senior economists said in a bulletin, occurring in four phases to culminate in a strong return to growth.
“We now expect many capital city markets to be more resilient with a national fall of 5 per cent between April and June next year,” chief economist Bill Evans and senior economist Matthew Hassan said.
“Of most importance is that we are much more optimistic about the pace of price appreciation over the following two years with a total expected increase of around 15 per cent.”
Melbourne properties are still expected to fall 12 per cent, but the projections of other capital cities have generally eased. Sydney is forecast to drop by 5 per cent and Brisbane by 2 per cent, while Perth prices could hold flat and Adelaide properties could rise by 2 per cent.
The update anticipates a period when people sell their homes because they can no longer afford the repayments.
It comes after the typical home shed about $12,500 since the beginning of the year, according to the Australian Bureau of Statistics (ABS), and follows revised forecasts of a 6 per cent fall by Commonwealth Bank.
Four phases and a return to 15 per cent growth
The property market’s road to recovery could take place in four phases, the economists said, but that road could be bumpy.
- Property prices could drop. Mostly behind us, this phase has to do with the drop in property values that took place because of the collapse in economic activity in the June quarter.
- Prices could stabilise over the December and March quarters, the economists forecast. There’s the possibility for some modest rises in property prices, but that is unlikely to be the case for Melbourne, which could still be falling in the December quarter. It’s expected to trail by about a quarter behind other states.
- There could be an increase in “urgent or distressed sales” as mortgage defaults go up as people fail to make repayments early next year.
- Prices will lift again. The most influential factors behind this recovery are a substantial boost from lower interest rates, especially low fixed rates, and a milder than expected recession.
Phase 3 poses “the greatest uncertainty for dwelling prices”
The combination of loan deferrals beginning to taper and government stimulus payments drying up could create an uncertain swell where house prices slip back again and endure “a minor softening”.
“This third stage of the cycle – when borrowers are obliged to resume loan servicing – presents the greatest uncertainty for dwelling prices,” the economists said.
They estimate about 60,000 ‘urgent’ sales could take place around March 2021, about 15 per cent of all homes sold in a year, and that it could be enough to shift prices downwards, particularly in areas where there are clusters.
“We anticipate a more benign disruption with the incidence of distress being lower, the widespread use of loan restructuring and the timing and volume of distressed sales being carefully managed by lenders,” they said.
Where we are today
Property prices have dropped recently, according to the ABS, but a rise in the number of loan commitments offers some promise that people have an appetite to buy.
Homes across all capital cities -- other than Canberra -- experienced a drop in the June quarter, the ABS, while the number of transactions fell substantially due to COVID-19 restrictions.
Melbourne home values dropped by 2.3 per cent, followed closely by Sydney at 2.2 per cent, with the drops being more pronounced for houses than they were for units, townhouses and villas.
The general fall in property prices is creating buying opportunities for investors, PIPA said. About 45 per cent of investors believed the economic conditions brought by the COVID-19 pandemic made it an ideal time to buy.
But there signs of a recovery are emerging. The value of home loan applications rebounded by nearly 9 per cent to $18.92 billion in July, the ABS said, marking the strongest monthly rebound in its data series.
“New loan commitments for owner occupier housing rose in all states and territories, except the Australian Capital Territory,” Amanda Seneviratne said, head of finance and wealth at the ABS.
The rebounding value of home loan applications still represented a drop from prior COVID-19 levels.
At the beginning of the year in January, for instance, home loan commitments were valued at $20.73 billion