The housing highway

Most analysts anticipated the Australian housing market would take a hammering from COVID-19. More than six months into the crisis, house prices have held up better than expected and experience suggests the sector will be among the leaders of a future economic recovery.

Laurence Davison Head of Content and Editor KANGANEWS

The Australian housing picture is unusually murky. Pandemic is the new backdrop for economic modelling while fiscal and monetary conditions are close to unique. Projections have to take account of things like an expected protracted fall in net migration caused by something other than the economic outlook.

Australian regional outcomes, meanwhile, are more divergent than at perhaps any other time. In late September, Melbourne remains in full lockdown and all expectations are for the state of Victoria to underperform even though it appears gradually to be winning its battle with a second wave of COVID-19. Western Australia (WA), by contrast, has been without community spread of the virus for nearly six months and could be set finally to pull out of its post-mining-boom housing doldrums.

There are outliers on both sides of the housing outlook – some who never predicted a crash and others who still believe a protracted price decline is the most likely path. But the most common trend among forecasters in the third quarter of 2020 is for revising projections on the upside. As with the public-health crisis – and with the same proviso that things can get worse in a hurry – the nearest thing to a consensus suggests Australian housing is, once again, doing better than bearish expectations.

No-one is suggesting COVID-19 has had anything other than a deleterious impact on the Australian housing market. It is down significantly from its most recent peak, just before the pandemic hit (see chart 1) and even the more optimistic observers are not ready to say the Q3 stabilisation leads to a straight-line recovery.

On the other hand, what is happening in the pandemic era could serve as another rebuttal of the most common concern voiced about Australian housing over the past decade or more. Having not crashed, as many of its peers did, during the financial crisis, many observers feared Australia’s high household indebtedness made its property market a bubble waiting to burst.

An orderly if limited correction from late 2017 did little to quell this fundamental concern as it was driven primarily by a regulatory handbrake and not by the most commonly expressed harbinger of doom – a jump in unemployment.

This has now happened: Australian unemployment reached a two-decade high in July 2020, rising to 7.5 per cent from around 5 per cent going into the COVID-19 crisis. The house-price index is down by only just more than 2 per cent, however – and the August unemployment number, at 6.8 per cent, recorded an unexpected upside surprise.

Despite the spike in unemployment, the first six months of COVID-19 had a smaller impact on Australian house prices than the Australian Prudential Regulation Authority’s 2017 decision to restrict banks’ provision of credit to housing investors. By late September, the CoreLogic house-price index was only slightly down on it historical high-water mark, and still 5.3 per cent higher year-on-year.

The question is whether market resilience can hold up indefinitely in the face of protracted unemployment, the impact of second and subsequent waves of the virus – should they occur – and the gradual withdrawal of government income support. A growing weight of opinion is coming round to the idea that, to at least some extent, yes it can.

“It wouldn’t surprise us to see prices starting to accelerate over the second half of 2021 even if the economy is still operating well below its capacity. The acceleration could be quite rapid if the economic direction is at all positive, simply because of how low the interest rate is.”


This positivity was not always the case. As Australia went into lockdown in March, analysts scrambled to work out just how bad the coming housing-market decline could be. To take just one – hardly unique – example, on 15 April ANZ research predicted a 10-15 per cent price fall by the end of 2020, “with downside risk”, on the back of a forecast 8-10 per cent drop in national GDP.

All the leading indicators were pointing in the same direction. Lending for housing fell in February, for the first time in nearly a year, as the “time to buy” dwelling index dropped into deeply negative territory. Quite apart from anything else, the mechanics of home buying became next to impossible as social-distancing rules banned open-home inspections and on-site property auctions.

Gareth Aird, head of Australian economics at Commonwealth Bank of Australia (CBA) in Sydney, tells KangaNews: “When the lockdowns came in we predicted a 10 per cent decline in the housing market from peak to trough, which we thought would occur over a six-month period. We saw auction rates and new lending drop dramatically in April, and sentiment looked really dire. This led us to expect a sharp contraction in prices but with the bulk of the damage being done by the back end of the year.”

The 10 per cent figure emerged as a consensus position for housing-market forecasts. National Australia Bank (NAB) economists expected this level of decline by the end of 2020 – driven by unemployment peaking at 11.7 per cent at the end of June and falling only as far as 7.2 per cent by year-end – with further decline in H1 2021 before finally reaching the bottom.

Westpac Banking Corporation’s outlook was only slightly more optimistic: a 10 per cent decline by June 2021, which it also anticipated would be the bottom of the market.

It did not take long for signs of resilience to emerge, though. In part, this was down to better-than-expected outcomes on the public-health front. Having initially warned the population to be prepared for the COVID-19 lockdown to continue for six months, tentative but the significant steps toward reopening the government was taking as early as mid-May, as daily new-case numbers dropped into the teens.

Aird now notes: “We – like a lot of others – have been surprised at how little prices have fallen nationally.” He points to lending activity being close to back to its pre-COVID-19 level, other than in Victoria, having begun to bounce as early as June. Meanwhile, the auction clearance rate has firmed in Sydney in particular (see chart 2), although turnover is still low on a historical basis.

“Our high-frequency data – for instance credit-card turnover – and Apple’s mobility numbers for July-August are saying even the 9 per cent contraction we were expecting in Victoria just isn’t going to happen. People are finding ways to spend money even though they are stuck at home.”


The emerging view seems to be that the housing market is on a hair trigger to rebound thanks to extraordinarily supportive monetary policy, related credit-market conditions and the relative lack of appeal of alternative investment markets. It is not so much that policymakers have cleared a path for the property market as that they have laid a 10-lane highway and removed the speed limits. If owners and investors are ready to get back on this metaphorical road, the way seems clear for them to make rapid progress along it.

At base level, the Australian cash rate at an unprecedented low of 0.25 per cent underpins cheap mortgage debt. Aird points out that the housing-market correction that began in 2017 halted and reversed – at an increasingly rapid rate – after the Reserve Bank of Australia (RBA) cut rates in June, July and October 2019. He also argues the reserve bank gets more bang for its buck from cuts as the headline rate gets closer to zero.

He explains: “It is not just the fact that mortgage rates are falling that matters but the percentage change. As the cash rate gets lower, each 25 basis point cut has a bigger impact on interest repayments. It might feel that there isn’t a lot of stimulus from rate cuts when there isn’t a large number of cuts, but there is actually a huge impact on interest payments the closer the rate gets to zero.”

Bill Evans, chief economist, managing director and global head of economics and research at Westpac, suspects a new mindset is emerging among borrowers. While the RBA has only cut the cash rate by 0.5 per cent in response to the pandemic, he argues that it is now so close to zero – and fixed-rate home loans are being offered at such attractive rates – that borrowers may feel they are seeing the best lending conditions they are ever likely to. This can only have a positive impact on the time-to-buy equation.

At the same time, the relative appeal of property as an investment option is likely increasing. Low yield makes fixed-income and term deposits unattractive absolute-return options, while the economic downturn is crushing dividend yield and capital gains in the equity market. Rental yield is also down, but with cheap debt and the potential for positive gearing available there are still grounds for investor housing demand.

Economists see no reason to expect supply of credit to dry up. There is speculation the RBA will keep an increasingly close eye on inflation, but it seems the reserve bank is willing to play its part in stimulating the economy for the time being. In particular, it has expended the supply of cheap funding into the banking sector via the term-funding facility (TFF).

This lends three-year money to banks at a fixed rate of 0.25 per cent and, together with massive deposit inflows, has caused a surplus of liquidity in the banking system and thus a hunt for assets. “The TFF has been expanded and the banks will draw it down,” Evans insists. “They have to do something with this money – and one thing they could do is start offering incredibly cheap fixed-rate mortgages. If this is the case it could be quite a stimulus to the housing market.”

The migration equation

A closed border and ongoing economic weakness even when it reopens means net migration to Australia is likely to be in the doldrums for some time. How significant an impact this will have on the housing market is a subject of debate.

Immigration had already slowed prior to the outbreak of the pandemic and it plunged as the health crisis led to strict controls on international travel.

The Australian government predicted in May that immigration would fall by 15 per cent in the year to 30 June and by a further 85 per cent in the next 12 months. This would represent a fall of almost 200,000 permanent arrivals relative to June 2019 and mark the lowest level of net immigration since June 1993.

Fitch Ratings research suggests this type of outcome will inevitably have a substantial follow-on impact on the housing market. The most recent Australian census, held in August 2016, showed the average Australian household had 2.6 people. If this ratio holds for immigrants, the reduction in net inflow between 2019 and 2021 would imply demand for around 76,000 fewer dwellings than would have been the case otherwise.

Nonbank lenders have already observed heightened price competition from Australia’s major banks, noting both the challenge this poses to their own business growth and the positive signal it sends about confidence in the housing market.

Nor is there any sign of the government and reserve bank turning the taps off. The extension to the TFF the RBA announced on 1 September is perhaps the most significant move in this space. It extends the deadline for banks to draw the facility’s A$68 billion (US$49.5 billion) additional funding allowance by three months, to the end of June 2021, and makes A$57 billion of supplementary funding available to be drawn by the same date. By 1 September, Australian banks had drawn A$52 billion under the TFF according to the RBA.

This is not the only government measure designed to encourage credit supply to households and SMEs. Most recently, on 25 September, the Commonwealth treasurer announced plans to implement various reforms to “simplify the provision of credit to consumers and small businesses” by overhauling responsible-lending rules.

A Treasury statement says: “The prescriptive approach in responsible-lending obligations guidance and internal lenders’ systems developed to comply with the guidance leaves borrowers and lenders facing a ‘one-size-fits-all’ approach… As a result, obtaining credit has become more burdensome for borrowers, irrespective of the risks they face, and significantly increased the time needed to gain credit approvals.”

According to Ken Hanton, director, client management and execution at NAB in Sydney: “A key feature of the government’s proposed reforms will be allowing lenders to rely on information provided by borrowers with borrowers to be made more accountable for the information provided for a lending decision. This is intended to replace the current practice of ‘lender beware’ with a ‘borrower responsibility’ principle.”

“We believe house prices will face downward pressure nationwide, as supportive factors will be outweighed by the impact of the change in net immigration along with high unemployment and general economic uncertainty. Indeed, risks to our forecast for house prices are skewed to the downside.”


The policy side of the equation is relatively conventional, albeit operating at its extremes in the extent to which it has been stretched to facilitate economic – and thus housing-market – recovery. But the circumstances that have led to massively accommodative monetary and fiscal settings are unusual in the extreme. Predicting the medium-term pandemic outlook is key to understanding the extent to which traffic will rejoin the housing highway.

“A lot of the models we have tended to use just aren’t particularly helpful at the moment because of the unique nature of what we are going through,” Aird admits. “Unemployment normally rises very quickly in a recession but there isn’t typically the short, sharp rebound in employment we saw when the economy reopened. There are so many novel dynamics to the COVID-19 situation – JobKeeper is another new feature, for instance.”

Net migration – another historically supportive input for Australian house prices – has effectively been decoupled from the economic trajectory as the local border remains all but closed as a pandemic-management measure. Opinions differ on how significant the collapse in migration will be for the housing market (see box).

There is also the issue of regional variation, which is producing the greatest diversity of outcomes across Australia since at least the mining boom of the early 2010s. Westpac, for instance, started basing its house-price forecasts on a combined state-by-state basis rather than a national average – simply because the range of outcomes is so wide.

The biggest outlier is Melbourne. The Victorian government imposed a new lockdown in July as COVID-19 cases spiked to a high of more than 700 a day – almost twice as many as the worst of the first wave, with many times more cases of community transmission. The data has improved markedly and the government announced a path of eased restrictions on 27 September, but state economic activity has been battered for a second time.

The threat is that protracted second, third and subsequent lockdowns could start to have a longer-term impact on capacity, eroding the supply side of the service sector in particular as a growing number of businesses capitulate in the face of revenue being cut off. Evans says this is something to keep an eye on but, so far, Victorians appear to have adapted their economic behaviour to lockdown conditions.

“Our high-frequency data – for instance credit-card turnover – and Apple’s mobility numbers for July-August are saying even the 9 per cent contraction we were expecting in Victoria just isn’t going to happen,” he explains. “People are finding ways to spend money even though they are stuck at home.”

This, Evans continues, means it is “pretty hard” to get the national number for house-price decline to 10 per cent on a state-by-state basis. “It’s possible, but it would need a disaster in Victoria – something like a 20 per cent fall, which would be 4-5 per cent nationally. On the other hand, WA has the lowest exposure to tourism and overseas students, but has worked through its housing oversupply and has its best ever affordability.”

Westpac and CBA are among the houses that have revised their property-market outlooks to the upside, the revisions coming in September in both cases. Westpac’s forecast is now for just a 5 per cent national price decline from the start of the COVID-19 crisis to the end of June 2021, nearly half of which has already occurred.

The bank sees this market cycle playing out in three phases from late 2020 onwards. The first, which it expects to take place in Q4 2020 and Q1 2021, is relative market stability and even a slight rebound, at least outside Melbourne. Later in 2021, Westpac’s economists anticipate renewed downward pressure as borrowers that have been on hardship assistance struggle to return to normal repayments and some forced selling emerges. This, however, is the extent of the so-called “fiscal cliff” they foresee emerging (see box).

Fiscal cliff may be a myth

One of the biggest fears about Australian economic prospects is what happens when massive fiscal support is withdrawn – originally expected to be at the end of Q3 2020. Economists say the idea of a short, sharp withdrawal of government support was always implausible, though.

When COVID-19 lockdowns hit, the Australian federal government responded with a raft of support measures for people whose income otherwise would have been slashed. In particular, it increased regular JobSeeker payments to the unemployed and offered the JobKeeper subsidy to employers suffering a 30 per cent or greater decline in revenue but which kept staff on.

These measures were initially available until the end of September 2020, and were described by government as a “bridge” to the other side of the pandemic. Although COVID-19 has so far been well controlled in much of Australia, its economic consequences are ongoing – and the government has responded by prolonging support measures.

Once this supply overhang clears, sustained low interest rates, regulatory support, improved affordability and an economic recovery should see housing back on an upward trajectory by early 2022, according to Westpac.

CBA’s outlook revision is similar. On 9 September, it published an update note saying: “We continue to expect prices to ease. But we are now looking for a national peak-to-trough fall of 6 per cent versus our previous call of 10 per cent. We now expect that trough to arrive in Q1 2021 versus end 2020 previously. And we expect a much larger disparity between outcomes by capital city than initially forecast.”

The central scenario is for dwelling prices to plateau in Q2 2021 before rising over the second half. CBA’s forecast is for solid price growth in H2 2021 as the economic recovery gains traction and incredibly low interest rates once again become the dominant influence on dwelling prices.

Some are less convinced about the improving picture. Ben McCarthy, managing director, structured finance at Fitch Ratings in Sydney, tells KangaNews: “We believe house prices will face downward pressure nationwide, as supportive factors will be outweighed by the impact of the change in net immigration along with high unemployment and general economic uncertainty. Indeed, risks to our forecast for house prices are skewed to the downside, and price falls could exceed 10 per cent if our assumptions about the path of the pandemic prove to be overly optimistic.”

The biggest challenge in calling the market may be how dependent it is on sentiment and how hard it is to predict this aspect given the unprecedented nature of the pandemic situation. Aird says it is possible that house prices could decouple from the economic trajectory entirely, at least for a time, thanks to asset-price inflation driven by ultra-accommodative monetary policy.

“It wouldn’t surprise us to see prices starting to accelerate over the second half of 2021 even if the economy is still operating well below its capacity,” he reveals. “The acceleration could be quite rapid if the economic direction is at all positive, simply because of how low the interest rate is.”