Housing prices in the shadow of COVID

Over the past few months, it seems everyone with an interest in real estate has been making Australian house price predictions. Those opinions have ranged from collapses to small falls, long-term stagnation, gentle rises and record-shattering jumps.

So, we asked one of Australia’s leading academics and government advisors on the subject to provide us all with some clarity.

Mike Berry is Emeritus Professor at RMIT’s School of Global, Urban and Social Studies.

Mike sat down and shared his expertise and insight exclusively with the Kooyong Group.

What do you expect will happen to housing prices in the shadow of Covid-19?

This is a different world with all kinds of new risks and uncertainties to navigate. The complex answer is that rises, falls and stagnation will probably happen in every region.

In big cities, mid-range properties will hold up, but you’ll see a dip at the top and bottom of the market. The smaller markets are likely to fare worse as a small volume of sales will be dominated by those financially stressed owners who are forced to sell.

So, you don’t believe there will be a big fall in prices?

In some areas, such as pre-Covid hotspots where prices previously skyrocketed, competition will cool and reset, resulting in significant declines.

I also feel lower value areas in outer suburbs are going to struggle because there won’t be much borrowing. People on lower incomes are going to focus on their current debt and meeting current mortgage repayments, while putting food on the table.

But overall, I expect this period of negative economic growth, weak population growth and falling incomes to have a dampening effect on prices overall until there are definite signs that the pandemic is under control. Over the longer term, prices will be driven by the fundamentals, economic and population growth.

What will keep prices steady in some areas?

Falling demand will be partly offset by less supply. When debt-free homeowners, and people who can service their mortgages, decide not to sell until values recover, it will keep prices from dropping too much. The supply of new housing will also fall as some developments are put on hold. Plus, banks are still rebuilding their reputations, so they might offer homeowners in arrears more time before taking possession and forcing distressed sales that would depress the market.

Is government policy going to impact prices much?

Definitely. Government income protection means that some people who can’t meet repayments, and may have had to sell at any price, can hold on to their homes and try to get back on top of their debt. Government funding for new social housing could provide a boost in the supply of housing for low income people without affecting prices much.

What’s the likely scenario for investment property owners?

Landlords with less debt shouldn’t struggle too much, unless their current income depends mainly on rental returns. However, those who are heavily leveraged are likely to face a difficult time – especially if ‘no-eviction’ regulations are extended and enforced.

They could get squeezed between servicing negatively geared property and tenants who are struggling to pay their rent. Tenants who become unemployed or lose jobseeker, or can’t survive on its reduced level, will intensify the pressure on landlords and their lenders.

What will be the catalyst for a return to normal?

It’s hard to know if we’ll ever return to pre-Covid normal. However, when we can get infections down to manageable levels, if not extinction, or see a mass rollout of an effective vaccine, that will be a game changer.

Where you can learn more from Mike Berry: