Price falls are unlikely for quality markets; however, some markets will fall, but where are they?
There is no doubt that we are in unprecedented times; accurately forecasting future property price movements is very difficult.
As Adrian Kelly (Real Estate Institute of Australia) put it, we can only look at what is happening in the market place at the moment as well as in previous times of high unemployment to provide pointers to likely outcomes [1].
Kelly mentioned;
“Currently we have a situation where listings are decreasing yet the enquiry level from prospective buyers is increasing. It is simple economics that when supply decreases and demand remains that prices edge upwards. They certainly don’t drop.”
What are the forecasts revealing?
In recent news; forecasts have arisen that suggest that the supply of new housing will be severely constrained over the coming year.
The Housing Industry Association is expecting the building of new dwellings to fall by almost 50% over the rest of 2020 and into 2021 [2].
This would result in a dramatic reduction in the supply of property to the wider market. This does not suggest a scenario of supply exceeding demand – a prerequisite for falling prices.
“Whilst it is expected that higher levels of unemployment will provide a constraint on house prices the anticipated levels of around 10% have been experienced before and we should look at what happened to housing prices then.”
Median Housing Prices, Interest Rates & Unemployment?!
Graphs 1 and 2 below show median housing prices, interest rates, and unemployment rates for the period from 1980 for News South Wales and Victoria – Australia’s largest housing markets.
Kelly reveals:
“History shows us that in the early 1990s we had a sustained period of unemployment above 10% yet median house prices remained stable.
It needs also to be remembered that in ‘the recession we had to have’ interest rates for housing loans were around double what they currently are. I do not believe that this points to a catastrophic outlook for house prices."
Which Markets Are Under Threat?
However, when it comes to forecasting property price movements; we need to look further than state-level analysis. Unfortunately, some property markets within Australian states are under threat.
Substantial falls are highly possible in property markets in Australia that are reliant on sectors of employment that are being most negatively impacted by forced business and border closures. For example, tourism is a sector of concern.
Our tourism sector was already struggling with the bushfire crisis when the coronavirus pandemic began. Now, with international, and some interstate, borders closed due to COVID-19, the sector is facing further challenges.
The Australian Bureau of Statistics overseas travel data, published for the first time this month, showed the severe impact of international border closures [3].
In April, there were just 21,620 overseas arrivals in Australia – a 99% drop compared to January.
According to the National Tourism Satellite Account, tourism accounted for 3.1% of GDP (or $60.8 billion) in 2018-19 and directly employed 660,000 people (or 5.2%) of Australia’s workforce.
But with overseas arrivals sparse for the foreseeable future, tourism hotspots are expected to struggle to attract capital and keep people in jobs, which could have a devastating impact on property markets in those regions.
As recently reported by Cameron Kusher (Real Estate Institute of Australia) The holiday property markets will be the hardest hit, in particular areas that have the highest share of people employed in Australia’s tourism sector [1].
Kusher comments:
“People whose incomes have fallen due to tourism shutdowns will be less able, and less willing, to take out a mortgage and buy their first home, upgrade or downsize.”
The property markets in Queensland, Tasmania, and the Northern Territory – some of which are still recovering after the Global Financial Crisis – that will likely bear the brunt of the COVID-19 tourism downturn include:
8 Markets Under Threat
1. Gold Coast.
A tourism mecca with theme parks and beaches.
2. Whitsundays.
The gateway to the southern Great Barrier Reef, Airlie Beach, Hamilton Island, and Bowen.
3. Cairns.
The gateway to the northern Great Barrier Reef and the Daintree Rainforest.
4. Hobart.
While it has been an extremely strong property market over recent years, it is a city heavily reliant on tourism.
5. Glamorgan/Spring Bay.
The home of Wineglass Bay and Freycinet National Park in Tasmania.
6. West Coast of Queen.
The home of Strahan and Queenstown in Tasmania.
7. Darwin.
The major centre of the Northern Territory offering access to the outback and Kakadu.
8. Regional NT.
The large region includes the Uluru area.
Key Takeaways
However; we remain hopeful that domestic tourism could be a saving grace. Overseas arrivals to Australia may have fallen dramatically, but on the flip side, there has also been a significant decline in the number of people leaving the country inspiring hope of a rebound in domestic tourism, compared to previous years.
Time will tell, as we navigate through uncharted territory.
When it comes to property market selection; a diverse employment base supporting the suburb is of paramount importance.
To stay up-to-date make sure you join our Weekly Property Market Pulse Newsletter here.
Adam Duffy - Partner at Meridian Australia
P: (02) 9939 3249
References
[1] Real Estate Institute of Australia
[2] The Housing Industry Association
[3] Australian Bureau of Statistics