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Will Australia’s rising unemployment cause the property market to crash?

By Binnari Property

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With the high levels of uncertainty surrounding individuals’ financial situations, a decrease in consumer confidence and the declining sharemarket, it is easy for some people to presume that the property market will fall as a result. Some economists are predicting potential price falls of between 5%-20%, with some media outlets quoting potential falls of up to 40% in the coming months.

Whilst it’s too early to make any absolute predictions about property values in a COVID-19 environment, we can speak to property professionals on the ground and explore the fundamentals of what is actually currently shaping our property market landscape.

The unique nature of coronavirus unemployment

Due to the implementation of social distancing and numerous restrictions, a unique situation has formed regarding Australia’s once reliable employment market. Most of the unemployment that is currently occurring is likely to be short term in nature, as most non-essential services have been forced to close their doors (or work from home) until this pandemic is under control. Once contained, most experts believe that many of the workers impacted by COVID-19 will be returning to the workforce as businesses re-emerge.

Does fast rising unemployment equal a property oversupply?

Freezes on mortgage and rent payments

Traditionally a significant spike in unemployment would lead to a large increase in property supply. Due to the unprecedented nature of this crisis, banks and governments are doing what they can to assist Australian’s to remain in their homes via mortgage repayment holidays or a 6-month moratorium on rental evictions for those that are renting.

As a result of this unprecedented support provided by both banks and the governments, we haven’t yet seen a significant spike in property supply that would otherwise accompany a sharp rise in unemployment. Unlike a traditional recession in which homeowners could be forced to sell their homes due to unemployment, we are currently seeing prices remaining buoyant across most parts of the country as most homeowners and renters sit tight.

This is backed up by Jason Rout, Director for Real Estate office Rout Brothers Brisbane. “We’ve seen a number of buyers pull out through no other reason than fear factor, which has resulted in most of those sellers deciding to pull their property from market. We’ve also seen a few clients put in opportunistic offers, but at this stage there is no real pressure or motivation from the sellers to accept these offers. On the flip side, the hesitation from buyers has led to an increase demand in our property rental business from local buyers who would have otherwise purchased and expats returning from overseas.”

Factors keeping the market afloat

Record low interest rates attracting new buyers

One thing to consider is the country’s record low interest rates. With a historic RBA rate of 0.25%, interest rates have never been more affordable for potential borrowers.

According to Nathan Ryland of PPD Real estate Sydney, one of Australia’s largest independent agencies, “whilst we have definitely had some buyers spooked in the current climate, we are currently finding that those buyers are being replaced with cashed up investors looking for an opportunity or potential homeowners who are mid-cycle and have only recently sold their own homes. We have seen some softening of prices at certain price points of around 5-10%, but generally the market is holding up well due to the limited supply.”

Low stock levels – Cycle of supply

Let’s remember that most of the Australian property market was in a relatively low supply environment pre COVID-19, as supply of new property development was significantly impacted in 2018/19. This was down to several key factors that included the uncertainty surrounding the 2019 federal election and the tightening of credit enforced by Australia’s mortgage regulator – APRA.

We are still experiencing relatively low stock levels says Ryland. “Whilst we are in unchartered waters, we are still finding the buyer demand is at adequate levels for the number of listings we currently have on our books. We experienced some of our best months in January and February, which was largely due to a severe undersupply of new listings”.

As is always the case, those individual property markets around the country with greater supply and a saturation of investors are more likely to experience significant falls. Should the property market suffer falls across the board, we can expect the suburbs with more homeowners than investors to bounce back quickly.

COVID-19 impacts everyone, but not equally

Whilst some Australians have lost their jobs or had their hours reduced, there are some industries thriving and certain jobs that are more secure than ever. For those with job security looking to enter the property market, record low interest rates creates a potential opportunity. Ryland backs this up. “We are finding those buyers are in industries where their jobs are secure such as healthcare who have finance in place, still have every intention to purchase during this time”.

So, where to from here for the Australian property market?

Safety in numbers

With governments and banks currently supporting both homeowners and renters, the true test for Australia’s property market is likely to come in the months and years following COVID-19 when the free money has stopped, and businesses return to their traditional trading rhythms.

Property taxes make up a significant portion of our State Government’s revenues, with the industry also being one of the largest employers in the country. As property is Australia’s largest asset class and the biggest asset class anchoring our banking system, you can expect to see governments and banks do everything in their power to prevent significant freefall in property values.

Speaking to Mr Rout, he believes property usually performs well in times of volatility, “From my experience, when times get tough property tends to perform relatively well as people look towards the safety of bricks and mortar.”

Post a COVID-19 landscape, it seems highly likely that further government stimulus will be provided to kick start the property market and shore up a major cog in our country’s financial system. Only then will we know if the current rise in unemployment is a temporary blip or has longer lasting implications for our property market.

If you wish to speak to one of our property experts to learn more, you can get in touch by clicking here

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