By Cameron Kusher, Executive Manager – Economic Research at REA Group
August 2020

Overview

The current housing market conditions can at best be described as uncertain. While data does show a moderate decline in property prices, it also shows that the number of vendors willing to sell (new listings) has been increasing, transaction volumes have lifted – particularly for vacant land – and enquiries to new-home builders and sales offices at new housing estates have increased. Simultaneously, the resurgence of COVID-19 in recent weeks has resulted in a second, more severe lockdown in metropolitan Melbourne and Mitchell Shire and stage three restrictions imposed across Victoria, including border closures, which has naturally reduced consumer confidence.

Search volumes for properties for sale and rent have been trending lower over recent weeks but still remain higher than at the same time last year. High-intent listing interactions have also started to ease. The weakness in each of these metrics has been obvious when looking at the data for Victoria with lockdowns leading to reduced search and demand; however, most states have also seen a softening trend, which speaks to a general weakening of consumer confidence.

While there has been some weakening of demand, transaction volumes have been increasing and new-listing volumes have been reasonably steady over the past month. Demand is particularly strong in the new-housing sector. The number of enquiries to new land estates rose in May, prior to the federal government’s announcement of the HomeBuilder scheme at the start of June, with enquiries surging further in June and remaining strong into July. Vacant land sales volumes have also increased dramatically since the announcement of HomeBuilder.

Another major driver of housing demand, aside from HomeBuilder, is that buyers still have access to state-based incentives, with first home buyers in particular also having access to the federal government’s First Home Loan Deposit Scheme. Additionally, these schemes can be used in conjunction with one another. Furthermore, the cost of borrowing has never been lower, and it seems unlikely that interest rates will increase any time soon.

Although the housing market has looked reasonably positive since the end of nationwide lockdowns, it is important to remember that overall, the economy remains precarious – especially given the latest developments regarding COVID-19 in Victoria. Furthermore, around 10% of mortgages currently have deferred repayments, unemployment is rising and although the deadlines for mortgage holidays and JobKeeper and JobSeeker have been extended, they are still drawing closer each day.

It is also important to keep in mind that international borders are currently closed and look likely to remain that way for the foreseeable future. Closed borders mean lower rates of immigration and therefore less demand for rental accommodation and new housing.

Finally, official interest rates have been cut to their lowest ever level (0.25%). The Reserve Bank has repeatedly stated that it will not increase rates until there is a trend towards full employment and it is confident that inflation can be kept within the 2–3% target band. As neither of these benchmarks were being achieved prior to the pandemic, it means that it could be several years until rates are increased.

Market activity

Over recent weeks, the volume of searches for properties for sale on realestate.com.au has started to ease a little. This is particularly apparent in Victoria, which is no surprise given the current lockdown. Although volumes are lower, they remain significantly higher than they were a year ago across all states, highlighting that many Australians continue to closely monitor properties for sale.

The volume of high-intent searches for properties for sale has also eased a little over recent weeks but remains well above levels from a year ago. This behaviour indicates that the volume of buyers close to transacting remains elevated but has started to soften. This may also reflect that some of the individuals previously undertaking the high-intent search activity may have actually transacted.

New property listings have increased throughout July and are higher than they were at the same time last year. Although listing volumes have climbed, the increase has stalled over recent weeks and new listings are yet to return to the levels achieved prior to the first round of COVID-19 lockdowns.

Transaction volumes have also lifted. with the numbers of properties being moved from for-sale to sold sections of reealestate.com.au are much higher than at the same time last year and back to levels similar to those before the COVID-19 lockdown.While iImprovement has been witnessed across the board, it is vacant land that has seen the largest increase.

Impact of HomeBuilder

On 4 June 2020, the federal government announced its HomeBuilder stimulus package. While interest in purchasing a new home was already climbing prior to HomeBuilder, it is safe to say the data suggests there has been an almost immediate response by the market to the announcement.

Enquiry volumes for land estates and apartment developments in the new-homes section of realestate.com.au had already begun to increase, however, the announcement of HomeBuilder took that increase to both new and unprecedented levels.

Over the past two months there have been almost 95,000 enquiries for new development. To give this some context, the previous year saw an average of around 27,000 enquiries a month.

Land estates have been the main benefactor of the increased rate of enquiry, with an average of almost 30,000 enquiries a month over the past two months compared with an average of less than 12,000 over the previous 12 months.

As previously mentioned, demand for vacant land advertised in the for-sale section of realestate.com.au has also increased dramatically since HomeBuilder’s announcement. Over the eight completed weeks since HomeBuilder was announced, 5,461 vacant land properties advertised for sale have been shifted to the sold section of the site. To put this into perspective, these 5,461 sales represent an 84.6% increase on the previous eight-week period and a 90.9% increase when compared with the same period as last year.

I would expect that the scheme, which is available until the end of 2020, will result in a heightened volume of enquiry to developers and builders throughout the remainder of the year as well as higher levels of vacant land sales.

The challenge will come in 2021 because many first home buyers are likely to have brought forward their purchase decision and, assuming international borders remain closed, there will likely be significantly reduced demand from overseas buyers and a reduced demand from investors.

Outlook

There are a lot of policies in place to support the housing market through COVID-19. In addition to the announcement of HomeBuilder, mortgage rates are the lowest they have ever been and the six-month repayment holiday initially offered by the banks has now been extended for a further four months subject to certain criteria.

The government’s economic support has been successful in minimising the economic turmoil from the recession; however, as each day passes, we move closer to the end of or a reduction in those support measures.

The Australian Prudential Regulation Authority has published July data that shows that 1 in 10 mortgages is currently deferred, and that unemployment is rising with the Reserve Bank is now forecasting it to peak at 10% and still be above 7% by the end of 2022.

While there has been fallout for the economy and the property market to date, it could be argued that both face further headwinds in the foreseeable future.

Despite all this, the data we are seeing around searches, enquiry levels, days-on-site and new listings is all quite positive, and that is without viewing it through the lens of the current recession.

Over the coming months, the broader economic and housing market recovery will be challenged by the fact that Melbourne is in lockdown and there remains the possibility of outbreaks elsewhere around the country. From a property market perspective, while the Melbourne lockdown will almost certainly impact the local market, repercussions will also be felt across the country as a consequence of falling consumer confidence and the economic impact of shutting down the nation’s second largest city.

The property sector as a whole is benefiting from significant stimulus and this is helping to support the rebound in demand and transactions. The combination of the momentum it enjoyed going into COVID-19 and the stimulus of historic low interest rates which are expected to remain at these lows for several years are likely to be positive for the property market. The main challenge to recovery at this point will be how quickly the economy can repair itself and what will occur as economic support is gradually withdrawn. Luckily, it sounds like the approach taken will be a pragmatic one. However, with 10% of mortgages being deferred and the challenges associated with reopening the economy, the pace at which recovery occurs could be affected.

The new-homes sector may also face challenges in 2021 when HomeBuilder ends. HomeBuilder is currently driving plenty of enquiries for new homes, generating a lot of demand from first home buyers but this demand is likely to be largely exhausted by the end of 2020. Assuming international borders remain closed in 2021, it is expected that demand for new housing will fall dramatically, particularly without any additional stimulus.

Home owners who are unsure about the state of the market or their finances should be speaking to their lender about the best way to manage through COVID-19, whether that might be applying for a mortgage holiday if they lose their job or have hours reduced, or their Smartline Adviser to find out if there are better mortgage rates available to them.