How Australian house prices could dive by 80 per cent with Sydney property back at just $200,000 in a ‘nuclear’ scenario where the pandemic can’t be contained – and it’s not as unlikely as you think
- Finance analyst Martin North says a 80 per cent house price fall is possible
- This case would see Sydney’s median house prices fall to less than $200,000
- Digital Finance Analytics modelled five scenarios for COVID-19 and property
A veteran finance analyst fears Australian house prices could dive by 80 per cent in an extreme scenario where the coronavirus pandemic can’t be contained.
Digital Finance Analytics principal Martin North has modelled five scenarios, predicting how new waves of COVID-19 could exacerbate mortgage stress.
In the worst-case situation, home prices would dive by 80 per cent within three years should the pandemic worsen and become uncontrollable.
‘Then there’s the nuclear option which is the uncontrolled pandemic where effectively you take interest rates deeply negative, unemployment goes through the roof, ‘ Mr North said.
Should that occur, Sydney’s median house price would dive from a shade under $1million now to less than $200,000, hitting levels unseen in Australia’s biggest city since the early 1990s.
Veteran finance analyst Martin North fears Australian house prices could dive by 80 per cent in an extreme scenario where the coronavirus pandemic can’t be contained (pictured, houses at Kellyville in Sydney’s north-west)
FIVE HOUSE PRICE POSSIBILITIES
1. 80 per cent plunge as uncontrolled pandemic caused unemployment to hit 16 per cent and interest rates fell below zero (five per cent chance)
2. 45 per cent drop as unemployment rose to 11 per cent following multiple COVID-19 waves (25 per cent chance)
3. 30 per cent fall as jobless rate touched 8.75 per cent (42.5 per cent chance)
4. 10 per cent drop as unemployment slips to 6.5 per cent (25 per cent chance)
5. 10 per cent increase as unemployment stabilised at seven per cent (2.5 per cent chance)
Melbourne’s mid-point house price would dive from $780,000 to just $156,000, going by CoreLogic data for September.
This financial catastrophe was rated as having a five per cent chance of happening, in circumstances where 65 per cent of borrowers were unable to pay their bills as unemployment more than doubled to 1930s Great Depression levels of 16 per cent.
To cope with such a calamity, the Reserve Bank of Australia would cut interest rates, already at a record-low of 0.25 per cent, to zero or negative levels.
Multiple waves of coronavirus could cause house prices to dive by 45 per cent as 45 per cent of borrowers suffered from mortgage stress and unemployment shot up to 11 per cent.
This scenario was rated as having a 25 per cent chance.
In August, a Reserve Bank of Australia paper rated a 40 per cent plunge in Australian house prices as ‘an extreme but plausible scenario’.
That would be comparable with the GFC a decade ago, which saw property values fall by 32 per cent in the United States, 37 per cent in Spain and 55 per cent in Ireland.
In a best-case scenario, Mr North envisaged house prices falling by a more moderate five to ten per cent as a COVID-19 vaccine was developed, unemployment fell marginally from 6.8 per cent to 6.5 per cent and the Reserve Bank cut interest rates to a new record-low of 0.1 per cent.
Should that occur, Sydney’s median house price would dive from a shade under $1million now to less than $200,000, hitting levels unseen in Australia’s biggest city since the early 1990s (pictured, Sydney’s city centre three decades ago)
This was seen as having a one-in-four chance.
The most likely scenario was one where house prices fell by 30 per cent as unemployment rose to 8.75 per cent, 42 per cent of borrowers suffered from mortgage stress and at least one major bank was bailed out.
Mr North put this situation as a 42.5 per cent probability.
Australia’s household-debt-to-income ratio of 186.5 per cent is the second highest in the world after Switzerland.
By comparison, Australia’s government debt levels are low by world standards.
A flurry of government spending to tackle the coronavirus recession is expected to see gross government debt surge past the $1trillion mark by June 2022 for the first time ever – making up 50.5 per cent of gross domestic product.
In the worst-case situation, home prices would dive by 80 per cent within three years should the pandemic worsen and become uncontrollable (pictured, pedestrians wearing face masks on Oxford Street at Darlinghurst in Sydney’s east)