How the coronavirus could impact Australia’s property market

As Australia experiences a steep rise in confirmed cases of COVID-19 and a recession becomes more likely, concerns over the pandemic’s impact on the property market are mounting.

Interest rate to remain lower for longer

For the second time in March 2020, the Reserve Bank of Australia cut the official cash rate to a new record low of 0.25 per cent in an emergency move to support the economy facing challenges due to the coronavirus.

RBA governor Philip Lowe said that the Board would not increase the interest rate “until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target band”.

“This means that we are likely to be at this level of interest rates for an extended period,” Dr Lowe said.

“Before the coronavirus hit, we were expecting to make progress towards full employment and the inflation target, although that progress was expected to be only very gradual. Recent events have obviously changed the situation and we are now likely to remain short of those objectives for somewhat longer.”

He added that the priority for the RBA at this stage is to “support jobs, incomes and businesses”, propping Australia up to a position where it can recover strongly.

The RBA has not made an out-of-cycle rate cut since 1997.

Recession and unemployment

AMP Capital’s chief economist Shane Oliver believes one of the biggest risks facing the property market is the prospective recession and the uptick in unemployment a recession could cause.

Dr Oliver expects at least two negative quarters of gross domestic product (GDP) growth in the first and second quarters of 2020, with the possibility of a third straight negative quarter as well. This is due to large parts of the economy – including tourism, travel and entertainment, which would also impact retail – effectively shutting.

AMP Capital’s base case – or the scenario the firm considers most likely to occur according to their financial modelling – suggests unemployment may rise to about 7.5 per cent, which could push property prices down by some 5 per cent.

This would then be followed by “a property market recovery into next year as the economy bounces back and pent-up demand is unleashed again helped by ultra-low interest rates”.

In the most extreme projected scenario, where unemployment rises to 10 per cent or more, housing prices could fall by about 20 per cent, as such a high jobless rate could cause a higher number of defaults, forced property sales and less spending.

Such a scenario could risk “tripping up the underlying vulnerability of the Australian housing market flowing from high household debt levels and high house prices”, Dr Oliver wrote.

He emphasised that this extreme scenario is not their base case and noted that the recent 9 per cent price growth in average capital city markets since mid-2019 would partly help in buffering any price falls.

Coronavirus hits consumer confidence

The latest figures from CoreLogic paint a picture of a recovering property market, with the national median value surging by 6.1 per cent to about $550,000 in the 12 months to February 2020. And both Sydney and Melbourne returned to double-digit annual growth, hitting median prices of about $872,000 and $689,000 respectively.

But the rosy data pre-dates the country’s rapid spike in coronavirus cases in mid to late March.

In a statement released on the day of the RBA’s emergency rate cut, CoreLogic said while a rate cut in normal circumstances could typically bring up buyer sentiment in the housing market, it did not anticipate the same response this time. 

“We do not expect this latest move by the RBA will increase housing demand while confidence levels are so weak and uncertainty is extreme.”

Strong buyer confidence and demand typically translates to higher property values and sharper price growth.

CoreLogic said low consumer confidence will take its toll on property buyers and owners considering selling.

“Transaction activity is likely to suffer more, as buyers and sellers retreat to the sidelines until some certainty returns to their decision making. This has been the outcome through historic periods of negative economic shocks,” it wrote.

But that outcome was only expected if the negative impacts of the coronavirus does not linger for more than a few months.

“A more sustained economic downturn would likely see households struggling with higher unemployment and underemployment.”

If you are worried about mortgage repayments during this uncertain period, consider using RateCity’s Mortgage Stress calculator to see if you might fall into mortgage stress.

You could also give your bank a call to find out what they are doing for customers in financial hardship due to the coronavirus.

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