Coronavirus could hit housing hard as Australia teeters on edge of recession
The growing probability of Australia’s first recession for nearly three decades could “stop the property market in its tracks”, according to industry experts, as the coronavirus outbreak threatens to wreak havoc on one of the economy’s key sectors.
Scott Morrison predicted on Tuesday that the coronavirus outbreak could have a greater impact on Australia’s fortunes than the global financial crisis.
But while a massive cut in interest rates, government stimulus and a ramping up of Chinese demand saved Australia and the housing market from the worst of the banking crisis in 2008-09, things might not work out so well this time around.
Outwardly, there doesn’t appear to be a problem for property. The latest monthly figures for house prices showed a rise of 1.1% across Australia and auction clearance rates were above 80% in Sydney and Melbourne last weekend.
Instead Australia faces a cocktail of economic headwinds: from a possible virus-driven lockdown of large parts of the population to rising unemployment, and from a struggling stock market to possibly even a credit crunch as banks across the world rein in riskier lending.
Louis Christopher, of Sydney-based SQM Research, says if potential buyers decide they don’t want to chance going to inspections or auctions for fear of contracting the virus it would be “very disruptive” for the industry.
But a greater risk is that the outbreak will trigger a job-cutting recession where there are fewer buyers, and owners are suddenly forced to sell if they can’t make ends meet.
“If there’s a short, sharp recession where we are in and out it will be much less damaging,” he says. “But if it’s more of a U-shaped recession where businesses have to lay off workers it will stop the market in its tracks.”
On Monday Westpac’s respected chief economist, Bill Evans, called a recession in the first half of this year as the coronavirus takes hold, and he was joined by forecasters at Bloomberg Economics. There may be hope that the Reserve Bank can ride to the rescue although its scope for effective action is limited because it has already cut borrowing costs to 0.5% and is running out of ammunition.
The Morrison government is about to unveil a stimulus package but it is doing so as Australians are feeling increasingly pessimistic about their finances. NAB’s monthly survey of consumer confidence published on Tuesday showed a negative reading.
According to Damien Klassen of the fund manager Nucleus Wealth, it will take something “amazing” for Australia to avoid recession and, with it, a property market slump.
“Will another rate cut be enough to stave off a rise in unemployment? Not a chance,” he says. “It was coming even before what’s been happening with the coronavirus. There’s been a slowdown in building approvals, the beginnings of a construction bust. Then we’ve had the bushfires and a hit to tourism, and then the coronavirus effect on top with more hits to tourism. Will you see companies go under? it’s possible because they can’t get supplies from China and companies can’t sell to China, our biggest market.
“It would take something amazing to prevent it. The government might try tax cuts or one-off payments but it won’t be enough to save jobs.”
Another threat to property, or more specifically mortgage availability, comes in the shape of a possible credit crunch. The spread, or difference, between what US companies pay to borrow money and the headline bank rate is widening and it could start to choke off the supply of capital to Australia’s banks. This week’s panic in the markets has caused it widen more, signalling an increasing concern in money markets that companies could default on loans which have ballooned to record levels in the past 10 years.
Digital Finance Analytics principal Martin North, a long-time property market sceptic who analyses data from household surveys to get an inside view of the sector, has already detected a tightening of lending.
“The uplift in prices since last year has been based on greater credit availability. The average first-time buyer loan has increased from $380,000 to $420,000,” he says. “But there are signs that borrowers are finding provisional loan offer not being converted into funding because banks are pedalling back on the offers.
Coronavirus has so far cost average the Australian superannuation balance $5,900, data shows
“Funding costs are beginning to rise and it could well be the beginning of a credit crunch. Banks are coming under more funding pressure and margins are compressed. Although they passed on the rate cut last week they don’t have much wriggle room left. As rates are cut, banks lend less because they can’t make as much. Mortgages are less available, not more.”
Not every industry professional is pessimistic, however, with many believing that the tried and tested benefits of investment in property will overcome any short-term difficulties that might emerge.
Frank Valentic, a buyer’s agent at Advantage Property in Melbourne, says there is no sign of any impact from the virus and notes that the market has already passed the last peak in September 2017.
“There’s a certain scare factor out there but I’ve not seen any sign of it so far. People are still queueing up to get in the door for inspections.
“If anything the situation with the stock market this week could have the opposite effect on property. People will want to put money into bricks and mortar. Its doubling every 7-10 years compared to watching savings lose value overnight in the share market.”
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