The Australian housing market has survived past economic disasters numerous times. With the RBA pouring support into the country’s financial system, will it be enough to save the real estate market from an impending market recession?
On Thursday, the Reserve Bank of Australia has bought government bonds and provided a $90-billion funding facility for Australian banks to help curb the fast-deteriorating economy. The central bank also cut interest rates to a low 0.25 per cent, which banks can loan to small and medium-sized enterprises on a three-year payment schedule.
However, with a fewer transaction and a risk for a countrywide lockdown, the residential real estate sector may well face its biggest challenge in more than a decade.
Review of Past Economic Shocks to the Australian Housing Market
Major stock market crashes and economic recessions do not necessarily indicate a decline in residential property values. When negative financial setbacks happen, the effect on the residential properties vary. The cost of real property changes depending on the impact market crashes and recessions have on the Australian economy.
To illustrate this better, consider the Black Monday share market crash of 1987. The Australian market lost over 23 per cent of its value in shares in one day – making it the worst one-day fall in history.
Despite the market incurring massive losses, the housing values remained unaffected. By October 1988, asset values grew exponentially because of financial deregulation. In a single year, the unemployment rate in Australia declined by 60 bps and the Hawke administration restored negative gearing. These events may have provided an extra boost to the housing investment during that period.
In recent years, property values became reactive to structural changes in the rental industry. From 2014 to 2017, numerous policies limiting the investment to rental housing led to the longest and largest drop in the Australian housing market since the 1980s. However, changes in serviceability assessment and rate cuts encouraged a rebound through owner-occupied properties.
Housing Market Viability Amidst the Coronavirus Outbreak
When the RBA announced a reduction in cash rates to almost a zero, the move somehow indicated that housing value might stabilise and rise eventually. However, the interest rate cut due to the coronavirus may negatively impact the country’s economy entirely.
The government may have released a $17.6 billion stimulus package and another one along the way. But the government has its limitations. The fiscal measures may, most of all, negatively affect employment. For the residential market, buyers may withdraw, and it would gravely impact property value, including equities.
People whose wealth were in the share market may see their share value crash. When this happens, it will diminish their ability to acquire housing property.
Shane Oliver, AMP’s chief economist, said prices could drop to as much as 20 per cent if the market recession would last over six months.
CoreLogic, a US-based research company, said the coronavirus outbreak had made the global so economy fragile that consumer confidence has become significantly weaker. Furthermore, financial distress, such as high domestic debt could lessen the demand for the Australian housing market.
With the market confidence down, auction clearances were still comparatively high last weekend as investors rush to sell assets amidst the escalating crisis. Sydney-based auctioneer Tom Panos noted an increase in vendors cashing out shares, while Pete Wargent – a buyer’s agent – anticipated a sudden drop once lockdown begins.
In reality, the monetary stimulus could do nothing to help the property market. Since consumer confidence, in general, has lowered even more, transactions would be scarce.
Damien Klasse, the Fund Manager of Nucleus Wealth-Melbourne, said the Reserve Bank has had exhausted its resources in the past by cutting interest rates to extremely low-levels. Therefore, the recent cut last Thursday will only have a slight impact on housing. Rising unemployment has become the most crucial factor in this equation, though. If unemployment increases, more Australians will be forced to sell their properties, causing a dramatic decline in property value.
Wargent, however, shared an optimistic view for housing wherein the economy bounces back after the government flattens the curve of new coronavirus cases in the last six months of the year. He said exceedingly low rates, another fiscal response package, and weak currency exchange to boost exportation are most likely to happen.
CoreLogic also shared positive news about the future of the Australian housing market. When restrained housing demands are released later this year, it will open to valuable buying opportunities where Australians can secure properties at meagre interest rates and with a competitive appraisal.