Market comment: Sydney property catches a virus and recovery’s not yet in sight

Wed, 15 Apr 2020

Market comment: Sydney property catches a virus and recovery’s not yet in sightWas our last article really just a month ago? In our March 2020 article reasonably entitled “Recovery roars ahead”, we talked about Sydney’s ‘improved and rising market’ and how fewer than half the homes for sale in the previous month had been on the market for more than thirty days. We also noted that Sydney property prices were on track to create what CoreLogic called “the fastest market recovery in Australian history”.

The chief economist at the Australian Bureau of Statistics (ABS) Bruce Hockman said that residential property prices had risen by 2.5 per cent nationally through the year, and the total value of Australia’s 10.4 million residential buildings had jumped to $7.2 trillion after a record rise of $294.4 billion in the previous year.

"Results are consistent with other housing market indicators, including new lending commitments to households and sales transactions, which have been rising over several months," he said.

Even the proportion of homes sold at a profit rose last year, according to new figures from CoreLogic, released in late March this year. Some 88.7 per cent of homes that resold during the December quarter changed hands at a profit, up from 87.4 per cent in the September quarter, the latest CoreLogic Pain & Gain report found.

Gross profits for the industry were $22.5 billion in the quarter, up from $18.7 billion over the previous three months.

In Sydney it was good to see first-home buyers returning to the market, to enjoy auction clearance rates of 82 per cent in February’s ‘Super Saturday’, and to see Domain predicting price rises to a new median before long. Even FOMO – the ‘fear of missing out,’ had returned.

More than one-third of Sydney homes for sale were sold prior to auction. This was a clear indication that both buyers and sellers were eager to close a deal. It wasn’t all that long before then that clearance rates had hit historic lows, so it seemed the good times were back, and vendors were relieved at the prices now being achieved. Buyers too could take satisfaction in getting in before prices went up further.

However, we did incorporate a note of caution in our March article due to the new and growing concerns about the coronavirus, an epidemic that Reserve Bank of Australia (RBA) Governor Philip Lowe said, “clouded the near-term economic outlook”. We also quoted Aidan Devine from who presciently observed: “coronavirus poses a major threat to the housing market and could derail sales if buyers stop going to open for inspections and auctions.”

We promised last month: “We intend to monitor the situation with regard to the Sydney property market and will provide monthly updates on this subject”. As we’re finding out, the coronavirus has had a rapid impact on Sydney property prices – and on the world, similar to and possibly greater than the GFC (Global Financial Crisis), with overtones of the 1918 Influenza Epidemic thrown in.

The coronavirus disease, COVID-19, has quickly become the principal factor affecting the Australian property industry. Its importance cannot be understated. 

Writing on the wall 

In early March, Matt Wade at the Sydney Morning Herald identified two separate but equally negative factors he called “Twin Shocks” that would hit the economy: “Economic growth in NSW could slump to the lowest rate since the recession of the early 1990s as key industries in the state struggle with the effects of the coronavirus outbreak and summer bushfires.”

NSW Treasurer Dominic Perrottet said there was ‘no doubt’ the coronavirus and bushfires would take a significant economic toll: “Tourism and education are on the frontline and they are feeling the pain right now - the impact will obviously flow through to retail, trade and investment the longer the situation lasts.”

While commenting on the recovery in property prices, Ingrid Fuary-Wagner, writing in the Australian Financial Review on 3 March, wrote: “Australia’s housing market faces a new balancing act, with a looming interest rate cut expected to offset threats that the coronavirus could derail reinvigorated buyer sentiment.

Domain’s Tawar Razaghi could still write on 12 March about ‘home-buying hopefuls’ asking to borrow more money to keep up with rising house prices, as figures showed the average size of new mortgages had soared. However, he did say: “The enthusiasm, particularly from first-home buyers and upgraders, defies the uncertain economic outlook as coronavirus casts a cloud over key industries.”

Serious concerns about the coronavirus and what it might do to the Sydney property market were being widely expressed by mid-March. Yahoo Finance’s Jessica Yun said: “With global stock markets swinging wildly from one extreme to the other as the coronavirus COVID-19 continues to spread, investors are feeling cold feet.”

However, she noted that “according to property experts, the tough economic climate could actually be viewed as a lucrative [buying] opportunity.”

Nerida Conisbee from optimistically said that the property market is “doing well”, with clearance rates high and buyer demand up thanks to all-time-low interest rates, and another emergency RBA rate cut on the horizon…but added: “I have no doubt that once COVID-19 is contained, we are in for very strong economic growth.”

Some analysts, like University of Adelaide academic Peter Koulizos, who at the time was advising against purchasing commercial property, got even more detailed in his predictions: “Many office workers will be working from home and there will be less need for office space,” he said.

“Once life gets back to normal and assuming productivity from workers does not drop markedly, many businesses and employers might come to the conclusion that they can continue to operate with less office space, thus decreasing their costs.”

Pride of place for accurate predictions goes to economist Trent Wiltshire who said in Domain: “The coronavirus is the biggest threat to Australia’s economy since the global financial crisis, and the property industry won’t be immune from the fallout. If the virus spreads widely and the economy weakens, the property market and the construction sector will be hit hard.”

Mr Wiltshire added for good measure: “It’s becoming more likely that the coronavirus will result in a substantial and extended economic shock. If this eventuates, there will be significant impacts on the property and construction sectors. Treasury research predicted that a severe pandemic will result in housing construction declining ‘dramatically’ and that house prices will fall.”

He said that in a worst-case scenario the direct impacts on the property industry would be magnified and will last longer: “There will be a bigger drop off in open for inspection and auction attendance; potential vendors won’t list until the crisis has passed. Demand for new houses and apartments will fall, putting developers, builders and tradespeople under pressure, resulting in construction activity falling dramatically.” 

And now?

So, in little more than half a year we went from bust to boom, and in little more than a month we went back to ‘bust’. There’s no putting lipstick on the pig now; it’s too early to make anything other than educated guesses about how the coronavirus will affect our lives, except to say that the effects will be widespread and largely negative. The impacts will be felt Australia-wide in a reflection of their worldwide nature. 

We can expect both buyers and sellers to pull back from the housing market, and this naturally means prices will fall. But that’s not just on dwellings; the bloodbath on the Australian Securities Exchange (ASX) has diminished the wealth of many Australians and therefore they’ve lost the ability (and probably the interest) to explore deploying more of their wealth into property.

Whole clusters of potential buyers will defer their property acquisitions. These include those who are suddenly unemployed, those whose working hours have been drastically reduced, those small business owners whose turnover has shrunk or who’ve temporarily had to close their doors, and those whose positions have suddenly become uncertain. Even die-hard investors whose property portfolios have seen significant declines in their rental incomes are going to hold off their next purchase. 

Sellers, of course, will be forced to accept lower values than they were previously expecting. This means that those who need to achieve the price levels they’d anticipated before the market’s decline will hold off their listings until better times. 

Our daily lives haven’t been the same since the federal government announced its strict containment measures in late March, just before we headed into the pre-Easter period which has traditionally been a time when property sales begin to slow down following the spring and summer peak periods. 

The government has already pumped billions of dollars into the economy in the probably forlorn hope of avoiding a recession caused by the effects of the coronavirus on virtually every aspect of Australian life. The conservative Liberal government has taken a leftwards turn and has begun to recall elements of the Rudd government’s pump-priming during the GFC.

But this time it’s a lot more than a simple handout for everybody to go spend and keep the cash registers ticking over. Now it’s a carefully crafted set of measures targeted at keeping businesses open and some sort of income-replacement payments flowing to displaced workers. The focus is on continuance and survival rather than simply priming a pump, and there’s nothing in the pipeline that’s going to stimulate property sales.

One giant change to the property industry is the federal government’s decision to ban real estate auctions from midnight Wednesday, 25 March. Real estate inspections were also banned as part of the government’s aim to combat the spread of the coronavirus. Some agents had already moved to conduct their auctions online, but the Prime Minister’s announcement forced that move to be made much more rapidly and widely than at first was anticipated. 

Public auctions account for only a small proportion – around 11 per cent – of the total residential real estate listings; the great majority of properties change hands through private treaty. However, auctions are the most visible face of the market and serve as our weekly barometer on property prices and clearance rates.

Ray White managing director Dan White outlined how the real estate industry could conduct itself in this new environment: “The key message to take away is that all real estate onsite and in room auctions and open house inspections will be cancelled…but our members will still be able to host virtual property tours, private inspections and on-line/digital auctions, as we have been encouraging,” Mr White said.

Domain’s Elizabeth Redman says about the new arrangements: “Real estate agents and the public have been fast adapting to new social distancing measures that provide for private home inspections rather than open homes, and virtual auctions instead of physical auctions.”

But the market has, for now at least, slowed to a crawl. “Residential property listings are starting to increase and accumulate,” SQM Research managing director Louis Christopher said.

“I note the surge of stock that has been on the market between 30 and 60 days. This may reflect the start of a capital city housing market downturn due to the health and economic impact of COVID-19.”

Online auctions are finding some success as agents, vendors and purchasers all adapt to new ways of doing things. James Kirkland, national sales and operations director of Sydney-based Upside Realty, said his business was already using software such as Skype, Zoom and FaceTime to give would-be buyers a virtual tour of properties and paperless contracts.

“Property is stacking up well as an investment compared with shares. If it is priced well, presented well and promoted well, it will sell and we’re not seeing any change in that,” he said.

In a recent online auction about 139 viewers logged onto their devices to watch a three-bedroom house in Epping go under the virtual hammer. After a slight delay to the scheduled starting time because of late bidder registrations and a slow start to the actual bidding process, there was a strong turn out from interested buyers with 10 parties vying for the property.

McGrath Epping selling agent Betty Ockerlander said it was hard to get started but she was confident as this property had good interest: “We had 28 private inspections. The tricky thing for us is if you had a face-to-face auction you could have guided people more.”

She said her team of agents had to wait until the competition narrowed down before they were able to speak to each one over the phone: “We couldn’t do that with 10 people. We had to wait to narrow it down to the top three bidders.” Eventually the winning bidders got the property they wanted. 

What comes next?

Duncan Hughes from the Australian Financial Review says there’s nothing new in our current situation: “The dire warnings are nothing new to industry veterans who have seen residential markets plunge six times in the past 33 years as a result of big overseas events.”

Brendan Coates, household finances program director for the Grattan Institute, is not in complete agreement: “This is going to be the biggest economic shock we've seen in our lifetime," he said. “The economy has in a week gone from motoring along close to 60km/h to hitting a wall; this has never happened before – even the GFC did not unfold this fast.”

He said that markets knew the GFC crisis was abating when banks stabilised and the credit squeeze eased. “We won’t see signs of recovery this time until there are signs coronavirus has stopped spreading,” says Coates.

Research firm CoreLogic says that the “extreme uncertainty and economic fragility” resulting from the coronavirus pandemic has made it difficult to expect any response from buyers and sellers to the RBA’s record low borrowing costs.

“As the coronavirus pandemic broadens, and the probability of an Australian recession increases, consumer confidence is trending lower from an already weak position,” CoreLogic said. “This will likely weigh on high-commitment consumer spending decisions, such as buying or selling a home.”

The Herald’s Elizabeth Knight says that the bottom line is that all bets are off when it comes to predicting what will happen to house values over the coming year: “Until a month ago economists were looking for gains of between 5 and 10 per cent in values this year. At best these will evaporate.” 

At worst prices could fall 20 per cent, according to AMP chief economist Shane Oliver. Dr Oliver believes that a recession with something like 10 per cent unemployment could trigger the underlying vulnerability of the housing market with its high prices and high debt levels. This could see a 20 per cent fall in prices, although he also says he’s expecting a more limited downturn in which prices fall about 10 per cent.

Dr Oliver also says that Australia’s property market has traditionally done relatively well during times of global economic shocks: “Investors switched from shares to property”, he said, noting that the local market also performed strongly during the Asian financial crisis of 1998 and the ‘dot-com’ bust of 2000.

“Our base case is for a rise in unemployment to around 7 per cent which is likely to drive a 5 per cent or so dip in prices ahead of a property market recovery later this year as the economy bounces back and pent up demand is unleashed again helped by ultra-low interest rates,” he said.

Analysts at investment bank UBS, meanwhile are expecting house price falls of anywhere between 5 per cent and 20 per cent, depending on how severe the pandemic becomes.

The bank’s chief economist, George Tharenou, told the bank’s clients that the number of properties being sold will “collapse – likely more than halving near-term – as long as the ban on auctions and open home inspections remains”.

“We also revised our forecast for home prices to start falling, given the hit to demand from the looming sharp recession and spike in unemployment,” he said in a note to clients.

Damien Klassen, of Melbourne-based fund manager Nucleus Wealth, said the RBA had used up all its ammunition by cutting rates to record-low levels. Rising unemployment was, for him, the most important factor in the delicate housing market equation.

“I’m sure they’ll try to pull something out of the hat because generally the government will do everything it can to save the housing market,” he said. “But once unemployment starts going up – and I can’t see how it won’t – people will be forced to start selling and prices will fall.”

Buyer’s agent Pete Wargent also believes property transactions are going to “drop off a cliff” during the country’s lockdown period, but that there is a “best-case scenario” for housing where the government succeeds in flattening the curve of new coronavirus cases and the economy bounces back in the second half of the year, poised to take part in the resulting recovery.

CoreLogic head of Australian research Eliza Owen said rising unemployment is set to put downward pressure on property values, although many potential vendors are likely to hold off selling in the current environment. “Loss-making sales could increase proportionally as those that sell are doing so out of necessity, even if it means accepting a loss.

“As housing activity is disrupted due to weaker economic conditions and social distancing policies related to curbing the spread of coronavirus, profit-making resales could become less common in 2020. However, whatever downturn is to be endured in property over the next six months to a year, it follows a decade of strong growth rates. As with the results in the December quarter, profit-making sales are more common where hold periods are higher,” she said.

One very important question is: How long will the downturn last? ANZ Bank economists Hayden Dimes and Felicity Emmett say that ongoing unemployment will have long term consequences: "Despite enormous fiscal support, unemployment is still expected to rise sharply through this period and is unlikely to fully recover for some years." 

They say major price falls will start showing up as early as this April’s sales figures, and even when social distancing measures are removed, it is unlikely prices will bounce back.

So, there we are now. In what seems like the proverbial ‘blink of an eye’ the world of  
Australian property we knew and understood has been turned upside down. Experts with years of experience in the property market have no uniformity of opinion about how severe the downturn will be nor how long it will last.

There’s little doubt that we face an uncertain future until the coronavirus pandemic has been brought under control, and that could well mean until an effective vaccine against the coronavirus has been released. Until then we face an environment of higher unemployment, some forced sales at less-than-wanted prices, fewer properties on the market, fewer purchasers looking for properties to buy, and tighter controls on mortgage finance.

To quote Anthony Quinn’s character in that delightful movie ‘Zorba the Greek’, it’s “the full catastrophe”.  But we must keep in mind that there will eventually be a recovery and when that comes there will be a ‘new normal’ much closer to what we’ve enjoyed until now.

As Nick Lenaghan wrote in the Australian Financial Review: “It's too early to call out silver linings in the dark clouds of COVID-19. But disruption does create opportunity. Yes, it’s getting tougher day by day. But when we get to the other side, there will be an economy and there will be a property market.”


‘Discounting creeps into property market amid coronavirus, but some vendors hold firm,’ Elizabeth Redman, Domain, 14 April 2020
‘Property prices to plunge as auction clearance rates fall off a cliff,’ John Collett, Sydney Morning Herald, 8 April 2020
‘What will the impact of coronavirus be on Sydney’s property market?’ Lucy Macken, Domain, 4 April 2020
‘Homes still selling online but majority switched to private treaty,’ Tawar Razaghi, Domain, 5 April 2020
‘Property listings still sitting on the market after four weeks: SQM’, Elizabeth Redman, Domain, 8 April 2020
‘Profit-making property sales rose in December quarter pre-coronavirus: report,’ Elizabeth Redman, Domain, 4 April 2020
‘Ominous signs the property market is running out of steam - and fast,’ Elizabeth Knight, Sydney Morning Herald, 2 April 2020
‘Australian housing market takes a huge hit with auctions set to plummet further this weekend,’ Ben Butler, The Guardian, 3 April 2020
‘There will be a property market on the other side,’ Nick Lenaghan, Australian Financial Review, 27 March 2020
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‘Coronavirus fears to test Sydney's property market as over 900 auctions to take place,’ Antonette Collins, ABC news online, 21 March 2020
 ‘Property 'panic buying is happening', Nila Sweeney, Australian Financial Review, 21 March 2020
‘Real estate auctions banned from midnight Wednesday in coronavirus crackdown,’ Elizabeth Redman, Domain, 25 March 2020
‘The only thing we can say with certainty is that the fallout from coronavirus is going to be brutal,’ Greg Jericho, The Guardian, 19 March 2020
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‘Twin shocks to hit the NSW economy hard,’ Matt Wade, Sydney Morning Herald, 2 March 2020
‘Virus poses 'rising risk' to housing market,’ Ingrid Fuary-Wagner, Australian Financial Review, 3 March 2020
‘Hopeful buyers ask to borrow more money as housing market outpaces expectations,’ 
Tawar Razaghi, Domain, 12 March 2020
‘How will the coronavirus affect the Australian property industry? Trent Wiltshire, Domain, 13 March 2020
‘How will coronavirus affect Australia's real estate market and house prices?’ Nigel Stapledon, The Guardian, 16 March 2020
‘One-third of Sydney properties selling before auction, new figures reveal,’ Tawar Razaghi, Domain, 14 March 2020
‘Coronavirus, bushfires and recession could have big impact on property market,’ Jonathan Chancellor, Daily Telegraph, 17 March 2020
‘Sydney, Melbourne house prices growing at fastest rate in three years before virus outbreak,’ Shane Wright, Sydney Morning Herald, 17 March 2020
‘The coronavirus crisis hasn't smashed the property market yet, but that could be about to change,’ Jack Derwin, Business Insider, 17 March 2020
‘Australian housing market will hit the wall in coronavirus recession, experts say,’ Martin Farrer, The Guardian, 20 March 2020
‘Virus will hit house prices, but history offers hope,’ Duncan Hughes, Australian Financial Review, 20 March 2020