April 21, 2020 by Dymphna

How much property prices will fall?

The CBA model is pointing to price falls, but it’s what’s on the other side that’s interesting.

Okay, number one question I get asked right now is, “How far are property prices going to fall?”

(Number two is: “omg. Who does your hair?”)

(It’s my hubby Brian. He’s a genius.)

Anyway, there is still an insane amount of uncertainty in this picture. It’s very hard to pin down.

The crisis could drag on for months, or we could find a successful treatment tomorrow, and be back in the saddle by June.

Who knows?

But the CBA economists have crunched the numbers. They’ve put what we know so far, plus some middle-of-the-road scenarios into their model to try and tease out just how big the price declines are going to be.

And note, nobody is talking about the property market getting out of this without taking a few hits in the short term. Nobody is talking out property prices rising over the next six months.

Anyway, they note a few interesting things I thought I’d pull out for you.  

First is that auction clearance rates have tanked:

That’s interesting because auction clearance rates are usually a pretty good indicator of prices. However, that fall is at least partly artificial, since the government effectively banned auctions.

Never-the-less, CBA reckon the major driver of price falls across the market is going to be unemployment:

Unemployment is rising very quickly. The government enforced shutdown has led to mass job losses. The ABS official figures are dated and do not capture the big lift in unemployment that has occurred since mid-March.

Our internal data on unemployment benefits (i.e. JobSeeker) paid to CBA accounts shows that there has been a surge in the number people receiving JobSeeker payments (chart 4).

This will continue to rise given the lag between applying for JobSeeker and receiving payments. We expect the unemployment rate to peak at ~8%.

That seems like a reasonable base-case to me. However, if there are second-order layoffs (because the economic downturn is dragging on and businesses can’t keep their heads above water), then I could see it getting worse.

CBA also note there has been a massive ‘mood swing’ in the market, with price expectations tanking:

The household perception around prices has shifted dramatically. According to the AprilWBC/Melbourne Institute Consumer Sentiment report, the proportion of households expecting dwelling prices to rise over the next twelve months has plunged to its lowest level since the question was first asked in late 2009(chart 7). This index has historically had a very strong leading relationship with dwelling prices. If households as a collective expect prices to fall then they will.

They then plug all of this into their model, along with some witches toe-nails and a few frogs. (Nah, they’re model has actually done a pretty good job in the past… that’s why I’m talking about it.)

According to their model, we’re looking at prices falling about 10%.

We have a central scenario that national dwelling prices contract by 10% over the next six months (i.e. average monthly falls of ~1¾%and an annualised pace of 20%). We would then expect prices to stabilise before gradually rising as the unemployment rate begins to decline and restrictions on activity, including the housing market, are eased. It is possible that prices rise briskly in 2021, as was the case from mid-2019 given the incredibly low interest rates.

I think this is reasonable, and this would be close to my base-case scenario.

Prices will fall like something in the order-of-magnitude of 10%, which I think most people should be able to weather, and then begin rise, possibly quickly, from there.

So you know, it’s tough times. But it won’t get too bad, and there’s light at the end of the tunnel.