The COVID-19 pandemic and the measures in place aimed at stopping the spread are curtailing economic activity significantly.
A recession is unfolding in Australia. Despite the massive waves of stimulus from the Federal government, State governments, Reserve Bank and banking industry – a recession is unlikely to be averted. In order to contain the virus, restrictions on societal movements are needed, which depress spending and economic activity. Moreover, the virus is causing heightened uncertainty, engendering caution among consumers and businesses. An economic contraction is currently underway, and we do not expect the economy to return to growth until the December quarter. But the timing and pace of this recovery remains dependent on how long it takes to effectively contain the virus. The exact profile of the recovery also relies on easing the uncertainty felt by people about the future.
Some of the restrictions in place are hitting activity in the housing and construction sectors directly. With the social distancing measures now in place, transacting for property has become more difficult and some construction projects have been extended, delayed or cancelled.
However, the sharp drop in demand and incomes is what will be felt most acutely across the sector.
We expect dwelling prices to fall this calendar year, as the loss of incomes, rising unemployment and a sharp population slowdown curb demand. We anticipate the fall could be as large as 7-10%, although forecasting is subject to higher variability than usual.
Auction clearance rates have collapsed in recent weeks, suggesting softer dwelling prices are likely in the period ahead.
New home sales have dropped sharply and should continue to fall in the near term, driven by the impact of COVID-19.
The weakness in overall demand this year is set to flow through to the construction sector.
Residential vacancies are expected to rise, reflecting weaker incomes, slower population growth and as owners of short-term accommodation look to secure longer-term stays. Downward pressure on rents is likely over the year ahead as a result.
However, there is unprecedented assistance which will cushion the downturn. Deferrals on mortgage payments for those who have lost income due to COVID-19 could limit forced sales. Also, some sellers might wait for a better time to sell their dwellings, if they are in a position to, cushioning the extent of price falls.
Stimulus measures will provide some fuel for housing price growth once the broader economic recovery begins, as will low interest rates; however, weak wages growth, a slowing in population growth and an unemployment rate that might remain high and sticky for longer could foil a recovery in dwelling prices.
Interest rates are set to remain low while the substantial level of additional liquidity provided from monetary authorities will take time to unwind. But this crisis will cast a shadow on the economy for some time.