CBRE Research delves into lessons learnt from the most recent economic shocks as the property market heads into a Coronvirus-impacted economy.
In these unprecedented times, what is certain is that there will be a correction to residential sales volumes and pricing in 2020.
Craig Godber, author of the Past Shocks & Impacts report and Associate Director of Residential Research for CBRE said while this will vary market by market and product by product, a broad 10 per cent pricing drop is not an unreasonable scenario with downside risks subject to how long lockdown measures remain in place and how significant and sustained the economic impacts and subsequent job losses are.
"The current period is certainly unprecedented in that the economic consequences have been brought about to protect the country from COVID-19, unlike past shocks which have been driven by economic fundamentals," said Mr Godber to WILLIAMS MEDIA.
"This, along with the support provided by the various levels of government provides some optimism that as restrictions are lifted, there will be a solid underlying base from which recovery can begin.
"In Australia, the majority of the economic impact is likely to be in the June quarter, although economic growth over the course of 2020 will be negative for the first time in almost 30 years.
"Unemployment looks set to reach around 10 per cent. As much as the magnitude of the decline is significant, even more significant is the pace of the downturn."
Mr Godber said hopefully things will be turning for the better from the September quarter.
"Meaning we will avoid more dire economic consequences and the worst case scenarios of 30 per cent plus falls in residential pricing," said Mr Godber.
"If a relaxation of social and economic lockdowns and low case numbers over the next couple of months is sustainable, market conditions (pricing and volumes) should start to show some positive signs from the final quarter of 2020 before a solid, although unspectacular period of consolidation in 2021.
"The demand for new supply, particularly apartments in the major capitals, will lag until border restrictions are lifted, given how significant offshore buyers and the migrant and student population are to the new supply and rental markets.
"The movement of short term letting property into the long term letting market will also not filter through the market until domestic and international tourism begins a recovery."
Mr Godber said positive signs could be evident from the December quarter this year before a year of consolidation in 2021 as the broader economy recovers, unemployment starts to come down and confidence levels and purchasing power gradually strengthens.
"This would set the base for a return to stronger growth from 2022," said Mr Godber.
Heading into 2020, Australia’s residential markets were well placed, with more than six months of strong price growth evident in Sydney and Melbourne and spreading to other capitals and sales volumes starting to turn from cyclical lows.
The year was looking positive on both fronts.
Of course, that has all changed now, but while the final depth of the correction is open to conjecture, it is interesting to compare the impacts of past economic shocks on residential sales volumes and pricing in Australia.
This at least provides some baseline for assessing the future.
The method CBRE used was to examine sales volume and pricing movements during and post three recent economic shocks, the Global Financial Crisis from 2007 to 2009 and stock market corrections in 2011 and 2015-16.
In past shocks, the general trend for sales volumes is they have either fallen rapidly from pre-shock peaks, or remained at a trough, before rebounding quickly as economic pressures ease and pent up demand boosts activity.
Global Financial Crisis
Source: CBRE Research
2011 Correction
Annual sales volumes were already at a trough but remained around those levels in 2012 and 2013.
Sustained growth didn’t kick in again until 2013.
Source: CBRE Research
2015-16 Correction
Annual unit volumes rose to a new record high in mid to late 2015.
They then fell by 19 per cent to the end of 2016.
Annual house sales volume fell more modestly, by around 6 per cent to 7 per cent.
Volumes then stabilised before a cyclical decline took place in 2018 and 2019.
The bottom line, according to CBRE Research, is that in the past, residential pricing has performed better than, as an alternate indicator, the ASX indices (either by falling less, i.e.: GFC and 2011 or still growing, albeit below trend) during the down phases, but then generally recovering quite quickly once the downturn has passed.
earchBy nature, residential pricing is less volatile than share market indices.
The COVID-19 pandemic, lockdowns and subsequent economic downturn is unprecedented.
The full scope of the impacts, particularly with regards to unemployment and household finances, and how long lasting they will be remains uncertain.
This will impact residential pricing and sale volumes.
A broad 10 per cent pricing decline in 2020 is not an unreasonable scenario, with risks on the downside.
History does show, however, that in past economic shocks, residential property in Australia has proved resilient.
Beyond an initial 12-month period of decline (or below trend growth), economic recovery and renewed confidence releases pent up demand and drives rebounds in both sales volumes and pricing.
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