Originally published on ABC News

Australia’s biggest home lender says house price falls so far during the pandemic have been surprisingly small, and its internal modelling is predicting a quick rebound everywhere except Melbourne.

The Commonwealth Bank’s economics team initially forecast an average 10 per cent slide in property prices nationally when the first wave of Australia’s coronavirus pandemic was at its peak in April.

Although, in a May trading update, the bank revealed that it had run stress tests using the worst-case assumption of a 32 per cent property price crash.

However, with the pandemic currently contained in all states and territories except Victoria, CBA has reduced its base-case forecast to an average capital city property price fall of just 6 per cent.

That forecast includes a worse outcome for Melbourne, which is tipped to see a 12 per cent fall in prices from pre-pandemic levels at the beginning of April.

“The best-case scenario happened for all states other than Victoria where the downside scenario materialised,” CBA’s head of Australian economics Gareth Aird noted in the report.

CBA is expecting price falls across the country to bottom out during the first few months of 2021, with a recovery in home values tipped for the second half of 2021.

The bank is tipping that home values will rise by around 3 per cent from their low point over the second half of next year.

Mr Aird also notes that Sydney and Melbourne had the strongest price gains coming into the pandemic, meaning that price levels in the two cities last month remained nearly 10 and 6 per cent respectively above the levels seen a year earlier, despite the COVID recession.

“We had always expected Melbourne and Sydney to underperform relative to the national average,” Mr Aird explained.

“The NSW and Victorian economies have more exposure to the most heavily impacted services sectors and less exposure to some of the more insulated sectors (i.e. mining and agriculture).

“In addition, the Sydney and Melbourne housing markets are more reliant on strong population growth via net overseas migration to underpin demand.”

‘Risks are skewed to the downside’

However, while CBA lifted its base case forecast for house prices, it also warned that there is not much upside left in its current forecasts.

“Relative to our updated forecasts, the risks are skewed to the downside,” Mr Aird added.

“Any imposition of restrictions would likely see prices fall more than our central scenario, which is based on no further lockdowns and a recovery in national economic activity from Q4 [October-December] 2020.”

As for why it is forecasting house prices to bottom out not long after unemployment is forecast to near 10 per cent, and while hundreds of thousands of home loan customers remain on mortgage repayment deferrals, Mr Aird tipped his hat to the Reserve Bank.

“The RBA has tended to play down the influence of monetary policy decisions on dwelling prices,” he observed.

“But we believe that changes in interest rates are the single most important driver of real property prices over the longer run.

“Our message here is very simple — the cost of money impacts all asset markets, including housing.

“The reason that asset prices, including dwelling prices, can seemingly decouple from the economy comes down to largely one thing — central bank policy and changes in the cost of money.”

Lower mortgage interest rates mean that home buyers — at least the ones who still have a job — can afford to take out bigger loans and bid more for the properties they want to buy, pushing up price levels.

First home buyers drive loan surge

These record low mortgage rates have also seen a surge in demand for mortgages, both new loans and the refinancing of existing ones.

While refinancing has dropped back a bit over the past couple of months from a peak in May, Canstar said the level of refinancing is still nearly 40 per cent above the same time last year, and almost $54 billion in home loans had been refinanced between April and July, according to ABS data.

“Our internal data shows that many borrowers are locking in very low fixed mortgage rates,” observed CBA economist Kristina Clifton.

The ABS data also show that the value of new loan commitments for housing in July was up nearly 9 per cent from the previous month and almost 12 per cent from a year ago, with first home buyers accounting for about a third of new owner-occupier loans.

“In spite of Melbourne’s relapse into lockdown in early July, new housing lending is up. But the closure and hit to consumer confidence may yet result in a downturn in months to come,” said Canstar’s Steve Mickenbecker.

“First home buyers in particular are returning to the market, rewarding government for some of the stimulus being directed their way.

“The house price expectations reading lifted by almost 22 per cent in September but still remains 37 per cent below the average level in the six months prior to COVID‑19,” Ms Clifton noted from the Westpac survey.


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