The market mood has turned… but let’s not get ahead of ourselves.
So, I get the sense the mood is shifting.
The last people to imagine that this was just a temporary blip on the radar – that we’d be back to business in as usual in a jiffy – they have all rolled over now.
Everyone is settling in for the long haul now. Queensland has shut the doors and is telling people that they don’t expect them to open again this side of Christmas.
So the expectations for the property market are being wound back as well. Every economist now has property price falls baked in for the immediate future. The only question is what kind of falls are we going to see?
NAB’s chief economist Alan Oster captures the mood:
“When you look at house prices, our expectation is 10% to 15% down.
And the main reason is the two big drivers. Number one population. I don’t think that you are basically going to open up international migration for at least the next 12 months, so that means population growth halves… And the second thing is unemployment. Normally when unemployment goes above 8%, you are in deep trouble.
“And all those things are going to pull the housing market down… [But] the one area I am particularly worried about is commercial property. For me, I think Zoom is permanent in terms of people working from home… The vacancies in some of the [CBD] areas, I think there is already massive oversupply.”
I’ve made that point about the commercial property sector before, and it’s why I think we might see residential supported by a transfer of funding flows.
But let’s unpack this a bit. Are we in “deep trouble”?
The point I would make is that NAB’s central scenario for a 10-15% decline is actually pretty tame in the scheme of things.
Remember, the property market normally grows around 5% or so a year – on average, based on historical experience. So what we’re talking about is giving up 2 or 3 years of price growth.
Across an asset that you own for 15-30 years – for 50 years – that’s not so bad.
We’ve also just had a period where the property market actually did fall by that much.
Between 2017 and 2019, on the back of the APRA credit restrictions, national property prices fell almost 11%.
This chart has all the previous property market downturns side by side, for comparison.
Now, you might remember that 2017-19 period. It was hardly catastrophic. Most people don’t even realise we had a contraction.
I certainly don’t think you would have described it as ‘deep trouble.’
The other point I want to make is around vacancy rates.
Right now, it’s true that vacancy rates in Sydney and Melbourne are up.
So there’s a clear upward trend there – though a fair chunk of it is driven by inner-city high-rise.
But even still, we’re talking about a vacancy rate of 3.9% in Sydney and 3.1% in Melbourne.
Is that ‘deep trouble’?
Hardly. Remember the rule of thumb is that a vacancy rate of 3% is considered balanced. That’s stable.
So we’re a little north of that mark. A little, but not all that much.
It’s only noticeably because we’ve had crazy tight rental markets for so long.
So again, we’re not in deep trouble yet. Not by a long shot.
So look, I just I felt I needed to add a bit of balance here.
Yes, the outlook is worse on the back of the Victorian outbreak. Yes, price falls of some magnitude seem inevitable.
But the wheels aren’t coming off just yet.