Grim outlook for Aussie house prices

At barbecues across our great Southern land, there is one topic of conversation that defines Australian life: housing prices.

Frankly it's not surprising. In decades passed, simply buying a property in the right area and holding onto it for long enough could quite literally net an owner more in capital gains per year than they earned from working.

On the other side of the coin, first home buyers have increasingly been priced out of the market, with many hoping for a price correction to more reasonable levels.

As the pandemic and its aftermath continue to unfold across the globe, economists and property market observers are wildly divided on what will happen to house prices in coming years.

Recently, some economists have become far more positive on the direction of property prices. Forecasting teams at both Westpac and the Commonwealth Bank (CBA) are now predicting strong price growth in the latter half of 2021, after relatively limited price falls of 5 to 6% across the nations capitals.

Talking about real estate and investing in real estate are both Australian pastimes.
Talking about real estate and investing in real estate are both Australian pastimes.

Sydney property industry insider, Edwin Almeida of Ribbon Property Consultants has quite a different viewpoint.

"From what my colleagues and I are seeing at a grassroots level, there are some areas where prices have already fallen 10 to 15%. And there are often quite large gaps between a vendor's asking price and what they actually get on the day," said Almeida.

"The market has quite a weak underlying foundation and while some areas are stronger than others, most of the pain for the market is still to come when JobKeeper and the insolvency moratorium finish up next year.

"Some desirable areas have something of a floor under prices, but overall the many downside factors are too severe for the market to overcome and I expect prices to fall over the next couple of years."

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As we head into an uncertain future, there are six key factors at play within the Aussie property market. The first three point to the possibility of a surprise property price bust, while the remaining three suggest we're heading for an unexpected boom.

Case against house prices rising:

REVERSING MIGRATION

In the recent Federal budget it was revealed net overseas migration would be in reverse until the 2022-23 financial year, with 72,000 people set to leave in 2020-21 and 22,000 in 2021-2022.

With more people leaving Australia than arriving in the next two years, this would leave the property market with almost 633,000 fewer participants.

At the national average of 2.6 persons per household, this would remove demand for approximately 243,000 properties at a time when the construction industry is building far too many new homes for local demand to absorb.

RISING UNEMPLOYMENT

With NAB Chief Economist Alan Oster forecasting unemployment to rise to 10% by early next year, there are concerns that the extremely high number of unemployed may eventually result in forced sales.

Data from the Reserve Bank shows housing turnover near record lows and with the property market still suffering from lower transactions due to the pandemic, it wouldn't take many unemployed homeowners potentially being forced to sell to place downward pressure on property prices.

Housing turnover rate since 1994.
Housing turnover rate since 1994.

LOAN REFERRALS EXPIRING

According to the latest figures from banking regulator APRA, there are more than 393,000 mortgages currently deferred, along with 205,000 small and medium business loans many of which are secured against a business owner's home.

In a survey performed in July for Rate City, 28% of households with loan deferrals said they won't or didn't know if they would resume their repayments and 25% said they would consider selling their property.

Case for house prices rising:

END OF RESPONSIBLE LENDING OBLIGATIONS

Recently the Morrison government announced it intended to scrap the responsible lending obligations contained within the National Consumer Credit Protection Act.

While these changes are still required to pass through parliament before potentially being put in place in March next year, the removal of the responsible lending legislation is already creating a sense of anticipation among some property market commentators.

Despite concerns the changes could encourage risky lending, the overall response from much of the property sector has been one of hopeful optimism that the changes will drive higher housing prices.

Treasurer Josh Frydenberg and Prime Minister Scott Morrison have laid out plans to boost the economy and the housing market. Picture: Sam Mooy/Getty Images.
Treasurer Josh Frydenberg and Prime Minister Scott Morrison have laid out plans to boost the economy and the housing market. Picture: Sam Mooy/Getty Images.

LOWER INTEREST RATES

With interest rates at record lows and forecast to go even lower at next month's Reserve Bank meeting, borrowers have been able to secure increasingly large loans relative to what may have been possible last year or even pre-coronavirus.

CBA's head of Australian economics, Gareth Aird recently stated low interest rates would be the main fuel in the sharp rebound in property prices CBA are now forecasting.

FURTHER GOVERNMENT INTERVENTION

It's no secret that the Morrison government would prefer housing prices to continue to remain high and despite the challenges presented by the pandemic, this appears set to continue.

The proposed removal of the responsible lending obligations is likely just the first tool of many the Morrison government may potentially use, in order to arrest a significant fall in home prices, should one occur.

Policies such as first home owner grants and other new initiatives would likely be under consideration by the Morrison government should property price falls accelerate, amidst a struggling economy.

Australian house prices face an unknown and uncertain future. Picture: AAP IMAGE/ Tim Pascoe
Australian house prices face an unknown and uncertain future. Picture: AAP IMAGE/ Tim Pascoe

BALANCE OF FACTORS

As we continue into an uncertain future, few are brave enough to claim they definitively know in which direction property prices are headed.

If the downside scenarios of high unemployment and reversing immigration are realised, this would place downward pressure on property prices amid forced sales. They face off against the forces of lower interest rates, looser lending standards and the Morrison government's desire for property prices to remain high.

For decades, the Australian love affair with real estate and rising property prices has endured, finding a way to dodge the impact of crisis after crisis. But in the midst of the pandemic and the worst recession in almost a century, perhaps it has finally met the bullet it can't dodge.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator