Recent house price forecasts have distressed many of us, but several indicators suggest that the Melbourne market will hold up reasonably well.
The Commonwealth Bank has warned that prices could crash by 32 per cent based on a “prolonged” economic slump scenario.
Last week, HSBC economist Paul Bloxham said that Melbourne prices could see a 17 per cent decline next year as the economic impact of the pandemic takes its toll.
We’ve faced economic upheavals in the past though, and it’s worth looking how house prices performed through them.
Consumer confidence has cratered over the last three months. A similar shock occurred in the early 1990s. The below graph compares then to now.
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Unemployment is tipped to reach 10 per cent in coming months.
During the economic crisis of the early 1990s, unemployment nearly doubled to more than 11 per cent.The below graph compares then to now.
Both of the above graphs show that Melbourne house prices fell by about 8 per cent over a 3-year period.
Unemployment eventually stabilised and consumer confidence gradually returned; the below graph shows that once this happened, Melbourne house prices began to recover.
Share prices have been remarkably stable over the last 4 weeks, following dramatic falls at the beginning of this Covid-19 crisis.
The ASX Indexes suffered similarly through the global financial crisis.
The below graph compares how the ASX All Ordinaries performed in the days following the collapse of Lehman Brothers in mid-September 2008 (blue) to how it has performed in the last 10 weeks.
Three insights from this:
Early falls have been much more dramatic in 2020; it took just 23 days for the index to fall 37 per cent, compared to 116 days in 2008.
The index is in a slightly better position now than at the same time during the GFC.
House prices fell by 3 per cent to 4 per cent in just 5 months during the global financial crisis, but rebounded quickly once the index bottomed out and began to improve.
One more condition worth considering when forecasting future Melbourne house prices is where we are in the cycle.
Melbourne house prices were rising considerably going into both the 1990s crisis and the global financial crisis of 2007-2009. In comparison, from 2018-2019, house prices fell by more than 10 per cent.
Before Covid-19 hit, the Melbourne property market had only just started to recover from the sharpest contraction in living memory.
Leading into 2020, house prices were not inflated. This suggests that there’s not much “fat” built into prices today, and Covid-induced decreases won’t be exacerbated by cyclical forces.
Significant falls in listings, clearance rates, sales and sentiment have already been noted.
Auction clearance rates have started to rebound. Melbourne returned a preliminary clearance rate of 72 per cent—a jump on the 57.3 per cent recorded the week before, and the strongest results since mid-March.
It’s a near certainty that house prices will fall in Melbourne. In fact, I’m seeing evidence (statistical and anecdotal) that prices have already fallen in a number of areas and segments.
This is consistent with historical trends which show the sharpest price drops occurring early.
Will house prices fall by 30 per cent? I don’t see it in the data.
I don’t see it when transacting in the market now as a developer and advocate. Nor do I hear signs of it when speaking with dozens of real estate agents across Melbourne every single week.
We’re living in unprecedented times, no doubt, and it would be foolhardy to rule out any possibility. But history suggests that house price falls of 30 per cent are extremely unlikely in Melbourne.
Andrew Stone is a director at Property Analytics, a specialist real estate research consultancy based in Melbourne.