September 28, 2020 by Dymphna

The timing on Westpac’s boom

Westpac is expecting a property price boom, but there’s more to it than that.

Westpac made headlines a few weeks ago when they said that property prices were going to boom 15%.

With most people still wondering how far property prices were going to fall, it was a bit of a shock to hear Westpac suddenly talking about a boom.

But the logic is solid. When you look at how much support is being thrown at the property market right now, it’s very easy to see prices going double-digits in the short term.

However, the headline figures, as always, disguise quite a bit of nuance.

Because Westpac are not saying that it’s nothing but upside from now on. They actually see the recovery see the recovery playing out in four distinct phases. This is what Bill Evans was actually saying:

We see the house price profile unfolding in four distinct stages.

The first, which has now largely passed, is the initial impact on prices from the collapse in economic activity in the June quarter.

That has seen broad based declines in Sydney (–2.6%); Brisbane (–0.9%); Perth (–2.6%); Adelaide (–0.1%) and a more severe fall in Melbourne (-4.6%).

However, the pace of deterioration outside of Melbourne has been milder than we expected back in March.

The second stage, which will cover the December and March quarters, will be a period of relatively stable prices, possibly with some modest increases, although Melbourne will be at least one quarter behind the other states and will still be experiencing falls in prices in the December quarter.

The third stage will see some limited resumption of downward pressure on prices through 2021, as we see an increase in ‘urgent’ or distressed sales relating to borrowers struggling or unable to resume mortgage repayments. Again, more adjustment is likely in Melbourne than the other cities.

This discussion of the third phase concentrates on the impact of a lift in supply from distressed sellers. However there will still be some offset from demand conditions, which will still be strong, supported by record low interest rates; policy stimulus and a recovering economy.

The fourth phase will come once this selling pressure has worked through the system and prices lift again.

This recovery will be supported by sustained low rates, which are likely to be even lower than current levels; ongoing support from regulators; substantially improved affordability; sustained fiscal support from both federal and state governments; and a strengthening economic recovery (particularly once a vaccine becomes available, which we expect in 2021).

In the fourth phase, which we expect will continue for at least two years, prices are likely to be responding to the ongoing strong liquidity in the system; record low rates and freely available credit.

… This will be a very constructive environment for dwelling prices.

Aside from ongoing support from policy, housing markets will also be buoyed by a strengthening economic recovery, slowly improving labour markets, the resumption of migration inflows and potential shortages of new stock.

We expect price increases over that 2021–23 period of 15% – around 7.5% per year.

These increases are likely to be distributed as: Sydney (14%); Melbourne (12%); Brisbane (20%); Perth (18%); and Adelaide (10%).

So we’re not launching back into a full-tilt boom just yet.

There’ll be that third phase to get through – as distressed borrowers exit the market, putting downward pressure prices.

That said, a lot of that depends on what banks, and authorities, decide to do with distressed borrowers – whether they decide to help them out or throw them to the wolves.

It wouldn’t surprise me if they decide to prop them up, especially if the economic recovery is slow to gain traction.

And that could mean the downside move in the third phase could be minimal.

But whatever the case, Bill Evans is right. There’s so much stimulus that has been thrown at the property market that it’s only a matter of time until it translates into price growth.