Weekly Wrap from Pythagoras Investing: House Price Outlook: -5%, -20%, or -30%?

There is little doubt that house prices will fall, but how far and for how long?

Down by 5%, 20% or 30%?

When we talk about house prices we are not referring to the selling of a particular house – but the average price of an area.  Therefore, published price moves refined for accuracy –  but the best we have! 

Coronavirus restrictions have caused a rise in unemployment, a fall in wages, a poor job market and a ceasing of migration.  Therefore, almost all the major drivers of property price have fallen at once. 

The two major types of property buyer have differing objectives and problems with a common root.  The owner occupier is likely to have issues with income due to their employment.  The investment property owner is likely to have rental income problems due to their tenant’s employment issues and the government’s stance on eviction.  Airbnb income has also been paused – along with all the associated services.

The temptation to be panicked is significant. 

Supply and Demand

In any real estate market, we have 2 types of seller – a forced seller and non-forced seller.  There are 3 types of buyer – opportunistic bargain hunter, investor, and residential buyer.

Like any good asset, the price will be set by supply and demand for property.

Currently demand is being hampered by income constraints.  Those with cash and debt capacity are raking through the market looking for bargains from forced sellers.

Supply of property is adjusting to the pandemic. According to realestate.com.au new supply is now falling – new listings are down 33% in the month of April. 

Banks are less likely to foreclose near term due to the governmental pressure applied.

However forced sellers will initially lead the market down as they lack choice.  Bargain hunters will do well if they are quick – but this won’t last for long.  We expect rational sellers, and by this we mean non-forced sellers, will do one of 2 things – withdraw their properties or wait and not adjust their price. 

Therefore, the supply that would force prices down is lessened.  Once the forced sellers have sold, the market can begin to stabilise. 

Later in the year supply will increase with the change of season.  This selling season begins typically around September/October and will bring more properties onto the market. We expect that by this point the majority of the pandemic effect will be over.  With that the market will be more balanced. 

Where will excess capital go?

Buying a small business is not likely to be a good investment near term.  Moreover, the stock market is going to be difficult for most people as stock choice will be highly specific.  In addition their stock returns will be based on being able to take advantage of price cycles – and trading them. 

People have got to put their money somewhere.

Property will benefit.

Property Outlook

We believe that prices will be down just 5% over the coming 6 months.  Areas without diversified industries may touch 8%. 

We expect that small dip for 6 months followed by a return to pre-crisis levels by Christmas.  By this point there should not be anything to justify a price reduction. 

Our view is predicated on jobs slowly returning, banks doing their bit, the government support continuing and no migration.  We expect migration will resume in 2021 as it will remain politically difficult to resume any earlier. 

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