Housing Market Damage ‘Less than GFC’

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Pressure for a significant house price correction is now much lower than just before the global financial crisis, says research house Oxford Economics.

With many global housing markets still feeling the impact of COVID-related restriction measures and data slow to reflect price changes, Oxford Economics senior economist Tamara Basic Vasiljev says the full extent of the damage on global housing markets is “yet to be seen.”

“Still, once the damage across the world is realised, we think it will likely be less than in the global financial crisis,” adds Vasiljev.

“The frothiest housing markets in New Zealand, Australia, Canada, the UK and parts of Scandinavia all saw prices retreat in 2018 and 2019. Housing markets in larger emerging markets have also been in retreat over the last few years – most notably China has seen its real estate bubble deflate since 2015.”

But with government support in many markets likely to reach its end, the analysis says household budgets could soon feel the hardest blows. “And possible second or even third waves of coronavirus would complicate labour markets and add further stress on real estate markets, with a full house price crash a distinct possibility,” explains Vasiljev. “Without additional waves, though, a much more likely scenario is sideways movement, or a modest price correction even in the most overpriced markets.”

In his budget update last week, Treasurer Josh Frydenberg tipped a major fall in net migration.

The update revealed Australia’s net migration could fall from 154,000 in 2019-2020 to a mere 31,000 in 2020-2021. Meanwhile, Domain’s latest house price report for the June quarter shows that Australia’s national house prices dropped 2% and unit prices dropped by 2.2% over the three months to June.

Australia’s budget deficit hit $85.8 billion last financial year, marking the biggest blow to the bottom line since World War II. The deficit is expected to reach another record high next year, with the federal government forecasting more than $184 billion in 2020-2021, as a result of spending to curb the damage from the pandemic. Frydenberg said the unemployment rate – currently at 7.4% per cent – is anticipated to hit 9.25% in the December quarter.

Oxford Economics notes that the largest advanced economies have seen household leverage come down since the GFC – adding that it is “largely at a sustainable level.” But the research house notes the exception of Australia, Canada and Sweden, where household debt is both high and increasing. Oxford Economics also points out that housing affordability – another prime suspect in real estate market crashes – is more of a problem in countries where house prices have outpaced income for decades, most notably in Australia, New Zealand, Canada, Spain and the United Kingdom.

The latest Australian Bureau of Statistics data shows the value of new loan commitments for Australian housing fell a sharp 11.6% in May, driven by strong falls for housing loans in New South Wales and Victoria. ABS data also showed a record number of Australians refinanced in May, with the total value of refinanced mortgages surpassing $15.1 billion, up 26% from $12 billion in April.

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