The Virus And The Rental Market

Feature Stories | Jul 30 2020

Covid has caused all sorts of upheaval across Australia’s rented property market, with significant implications for private investors and investors in listed property stocks

-House prices may not see too much damage
-Residential rents nonetheless under pressure
-Unemployment and reduced migration major issues

By Greg Peel

The world is yet to see the full extent of the damage wrought on housing markets by the global recession, suggests Oxford Economics. Activity is distorted by ongoing lockdowns, and re-lockdowns, and statistics are slow to reflect price changes.

That noted, Oxford’s economists believe that once the dust settles, the ultimate damage, globally, will likely be less than that brought about by the GFC.

The key drivers of house prices are affordability, mortgage debt levels and costs, and housing investment, and these are currently working together to mitigate the impact of falling incomes, Oxford notes, as are fiscal policy measures to support households and the postponement of mortgage payments.

The pressure building towards a significant house price correction is now much lower than it was before the GFC. The frothiest housing markets in the world, which included Australia and New Zealand, all saw prices in retreat across 2018-19, Oxford notes.

The risk, however, is one of government support reaching and end and labour markets showing little sign of a quick recovery, thus delivering the hardest blows to household budgets. Notwithstanding second or third waves of the virus would add further stress.

In this scenario, a full house price crash is a distinct possibility, Oxford warns. Without additional waves, a much more likely scenario is sideways movement or a modest house price correction.

It is thus not without trepidation we note Australia’s Melbourne-centred second wave is now greater than the first wave.

Unfortunately, Australia is one exception to a global trend of household debt decreasing since the GFC. Previously low mortgage rates are now even lower, but the flipside is stricter lending conditions. Housing affordability – a prime suspect in housing market crashes, Oxford notes – is more of a problem in countries in which house prices have outpaced incomes for decades, which of course includes Australia.

The problem is mortgage rates now have little room to fall any further, which at any other time would help stave off defaults. This creates a risk of households cutting discretionary spending, Oxford suggests.

On the other hand, this is mitigated to some extent by stricter lending measures leading to fewer higher level loan-to-value ratios, and household savings accrued during lockdowns.

But what about rents?

Analysis of payroll data from the Australian Tax Office has allowed the Australian Bureau of Statistics to break down the virus impact on payrolls by industry. The June quarter Housing Affordability Report released this month by ANZ Bank-CoreLogic notes that between March 14, when the hundredth virus case was notched up in Australia, to June 27, -21.2% of payroll jobs had been lost in the accommodation & food services industry and -18.% in arts & recreation. This compares to a total payroll loss of -5.7%, and only -4.2% in all other industries bar those above.

This has important implications for the Australian rental market, the analysts note, because those employed in these industries are more likely to be renters.

There are, nonetheless, a couple of factors that will have helped offset the impact.


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