Fitch: House prices to take hit of up to 10% as immigration falls

Australia’s house prices are set to fall by up to 10 per cent over the next 12 to 18 months, credit agency Fitch has warned.

Fitch says the slowdown in immigration could have a significant effect on property prices. Picture: ThinkStock

Australia’s house prices are set to fall by up to 10 per cent over the next 12 to 18 months, as net immigration weakens sharply, credit agency Fitch Ratings has warned.

The agency expects drops to be in the range of 5-10 per cent and is in keeping with recent forecasts by economists who are calling a softer landing for the housing market than initially feared.

But the COVID-19 pandemic could cut underlying demand for new private houses and apartments in Australia by between 129,000 and 232,000 over the next three years, the Nat­ional Housing Finance and Investment Corporation said this week.

Fitch said immigration had already been slowing prior to the outbreak of the pandemic, but has plunged since the health crisis led to strict controls on international travel.

“Large falls in underlying dwelling demand are already putting upward pressure on vacancy rates and downward pressure on rents, particularly in some inner-city areas,” the agency said in a report on Tuesday.

“If sustained, this could cause a contraction in construction activity that would add to the recessionary forces impacting the economy,” it added.

The Australian government in May predicted that immigration would fall by 15 per cent in the year to June 2020 and by a further 85 per cent in this financial year. This would be a fall of almost 200,000 permanent arrivals in fiscal 2021 relative to fiscal 2019, and mark the lowest level of net immigration since June 1993.

Fitch does not expect restrictions to be eased until well into 2021, and there may be public pressure on the authorities to limit immigration in the near term as long as unemployment remains high.

The decline will lead to a significant drop in household formation and Fitch estimated the reduction in immigration between fiscal 2019 and fiscal 2021 would imply demand for around 76,000 fewer dwellings than would have otherwise been the case, as population growth crashes to 40 year lows.

Fitch said the “exceptional uncertainty” related to the current recession, and its disproportionate impact on young people, is likely to reduce household formation and property demand by even more.

The Australian Bureau of Statistics has indicated that 171,000 housing approvals were granted in fiscal 2020, well down on he boo time peak of 243,000 in the 12 months to August 2016.

Monetary policy has also loosened, which could provide some support for house prices, as could government policies targeting support for the housing sector.

However, Fitch argued house prices would face “downward pressure” nationwide, as supportive factors would be outweighed by the impact of the change in net immigration, along with high unemployment and general economic uncertainty.

“Indeed, risks to our forecast for house prices are skewed to the downside, and price falls could exceed 10 per cent if our assumptions about the path of the pandemic prove to be overly optimistic,” the agency said.

Price declines would vary between regions, and Residential Mortgage Backed Securities transactions that have collateral concentrated on inner city units in Sydney and Melbourne may be more affected.

“We remain alert to the potential for downside risks associated with the pandemic’s evolution, and will continue to monitor trends in the housing market closely,” Fitch said.