Property prices hang in balance as pandemic fears rise

With a renewed outbreak of COVID-19 cases in Melbourne and NSW, experts are expecting substantial property price falls; though the risk to Melbourne prices is greater because of the city’s return to a full, six-week lockdown.

So far, property markets overall have proven relatively resilient. For the three months to June 30, Melbourne dwelling prices fell by 2.3 per cent and Sydney prices by 0.8 per cent. However, prices are still up by more than 10 per cent in the past year, figures from CoreLogic show.

Property Prices - Salt Finance
ABS figures show a record fall in new lending for housing in May.

Nevertheless, average price changes can mask big differences in various property market sectors.

For example, one-in-three of Melbourne CBD apartments that were sold in the first three months of the year – even before the pandemic hit – changed hands for less than their purchase price. Almost 70 per cent were owned by investors. Vacancy rates for apartments in Melbourne’s CBD and for Southbank, in particular, and in Sydney’s CBD, remain persistently high.

AMP Capital chief economist Shane Oliver says high unemployment, a pause in immigration and rent payment “holidays” pose major threats to property prices over the next year.

He expects home prices to fall by 5-10 per cent nationally, with price dips in Sydney and Melbourne at the top end of that range.

“[There is a] risk of much bigger falls if the renewed rise in coronavirus cases leads to an Australia-wide lockdown,” Oliver says.

“Melbourne, particularly, is at risk as its renewed lockdown pushes more businesses and households to the brink,” he says.

Economists at NAB, led by Alan Oster, expect the COVID-19-induced recession to result in peak-to-trough price declines of 10-15 per cent.

NAB economists are forecasting Sydney prices to fall by just under 10 per cent from the start of this year to the end of 2021. For Melbourne, they expect a dip of about 14 per cent over the same period.

Tim Lawless, Asia-Pacific research director at CoreLogic, says “stay at home” rules would likely mean the market is significantly disrupted again, after an improvement in sales numbers since Easter.

A variety of factors have helped protect home resale values from more significant damage, including lower stock levels and significant government stimulus, Lawless says. That is in addition to record-low interest rates and lenders’ mortgage repayment pauses that have helped keep forced sales off the market.

Figures released last week by the Australian Bureau of Statistics show national demand for new home loans plunged 11.6 per cent in May.

“This was the largest fall in history, driven by strong declines in the value of loan commitments for housing in NSW and Victoria,” said Bruce Hockman, ABS chief economist.

The value of new loan commitments for owner-occupier housing fell 10.2 per cent, while investor housing loan applications plummeted 15.6 per cent.

The number of owner-occupier first-home-buyer loan commitments fell 9.3 per cent.

The figures for May reflect COVID-19 restrictions in April, as home loans can some time to settle.

Simon Pressley, managing director and head of market research at buyer’s agency Propertyology, says the May data was expected, as it was the month when the lockdowns were at their tightest.

“Since then, Australia has opened up considerably, with the exception of Melbourne,” Pressley says.

Melbourne and Sydney have the most exposed property markets as both cities are disproportionately affected by a freeze on international tourism, international students and overseas migration, he says.

Still, Pressley maintains price declines in the two cities would not likely be in the double digits.

“Record-low interest rates, many mortgage holders having cash reserves in redraw, low supply of real estate sales listings, empathic banks, and government support packages provide a safe cushion for property markets,” he says.

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‘The clock is ticking’: what will happen when Australia’s mortgage freeze ends?

Nearly 500,000 Australians whose livelihoods have been hit by Covid-19 could face a ‘financial cliff’ when payment pause ends, analysts say

mortgage freeze - salt financeKristina Carson knows it’s not a get out of jail free card. But with nearly 500,000 others, the Brisbane cafe owner needed help from her bank when the coronavirus pandemic devastated her business.

Australia’s banks have given six months’ grace to thousands of customers like Carson under their mortgage deferral scheme, which with the government’s jobkeeper program has enabled households to keep afloat since the pandemic took hold in March.

“When the opportunity came up to defer loan payments it was really a necessity for me to do that,” Carson says. “I’ve got a 14-month-old son and another on the way in August so we had to make sure that we could keep a roof over our heads and it’s been a big help.”

The big question now is what happens when the scheme runs out in September – because it is clear that the economic slump induced by the crisis has some way to run.

The Australian treasurer, Josh Frydenberg, has already admitted the country is in recession without even waiting for the official confirmation. The latest unemployment figures released this week showed that the jobless rate is 7.1% and most economists believe it will reach double figures in the coming months.

It is a fast-moving situation, and while Australia’s efforts to stop the spread of the disease have boosted confidence, the banks know that many people will not be going back to their pre-Covid income any time soon. With that in mind, they have started talking to their customers to assess whether they will need more help after September.

For people like Carson, who has home and business loans totalling more than $500,000 with NAB, it is not clear what will happen, although she expects some negotiations with her bank.

Salt Finance - mortgage freeze“The payment deferral finishes after six months so then we have no idea what the future will hold,” she says. “We will reassess with them and see what they can offer.

“We know this scheme is not a get out of jail free card and the interest has to be paid.”

According to an NAB spokesperson, the bank is now speaking to its customers “to check-in, see how they are doing and understand where we can help”.

Carson has a newsagency in Brisbane’s CBD and opened a cafe, Más Espresso, last March. Together they employ 17 people. Both businesses depend on foot traffic and, while she says many offices have reopened in recent weeks, they cannot accommodate all their workers because of the government’s distancing rules.

“Even if they all come back there might only be 30% occupancy so we’re looking at a city of only 30% capacity,” she says. “We rely on foot traffic so it’s a long-term thing. We’ll have to think about staffing levels and what we order from suppliers.”

The looming economic cliff edge is causing alarm throughout the country, including at Sydney’s Martin Place, where the Reserve Bank’s experts have been preparing for the worst.

Documents emerged this week revealing that the RBA considered advising the government to suspend real estate transactions during the pandemic in order to prevent the property market from going into meltdown. The RBA thinks that prices could fall 15% in the worst-case scenario.

The payment deferral scheme and jobkeeper have helped stave off those fears so far and the RBA believes that the big retail banks and government will manage the schemes so that the economy does not fall off a cliff.

The financial comparison website RateCity.com.au has warned that there is a hidden cost to the deferral scheme because homeowners’ payments would end up being higher. Someone with $400,000 owing on their mortgage who paused their repayments for six months would see their total balance rise to $407,203, meaning they will pay $62 a month more on their loan.

“In the long run, mortgage deferrals come at a huge cost,” says RateCity research director Sally Tindall. “Banks continue to charge their customers interest even when the loan is paused. This is something many people we’ve spoken to were not aware of.

“The bigger issue is what happens at the end of the six-month pause if someone still can’t make their mortgage repayments. The clock is ticking for these customers who haven’t been able to regain employment and probably feel like they’re on borrowed time.”

In addition, mortgage stress is on the rise, with 37.5% of homeowners under pressure as opposed to 32% before the crisis, according to research by Martin North at Digital Finance Analytics. He says the bank and government support schemes have helped soften the blow on many people who lost incomes in the initial phase of the crisis, but he has detected increasing stress on more professions.

“We’re starting to see pressure on more upmarket jobs. It started with young people in lower income jobs, gig jobs, but now it is more stable jobs,” he says. “If the September cliff emerges then it will heap pressure on firms to reduce staff numbers. Unemployment might remain high for a long time.”

He anticipates that the banks and government will do whatever it takes to keep people solvent and avoid the potential disaster of thousands of homeowners being forced to sell their properties because they cannot keep up with payments.

Salt Finance - mortgage broker“The question is what will banks do?” North says. “They are not in any hurry to foreclose on people because that means they have to declare bad loans and that means they have to hold more capital. So they will try to do anything they can to allow people to keep their homes – they will prefer that to foreclosure because that is just cutting off their nose to spite their face such as is the scale of their investment in the housing market.”

At the sharp end, Carson is hoping that the banks will do just that as she tries to keep on an even keel in the storm.

“It makes it bit easier knowing that we’re going through this with everyone else,” she says. “But not knowing how long it’s going to go on makes it harder. So I hope the banks will be understanding and supportive. Only time will tell what they will require from us.”

 

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