Home prices to drop 20pc if unemployment spikes: AMP Capital

AMP Capital sees 20pc drop in home prices if unemployment rises to double digit figures.

Home model on the growing coin stack for concept of money saving for home buying fund

Residential property prices face a 20 per cent fall should unemployment rise to double digit figures, new modelling from AMP Capital shows.

Pent-up demand from buyers forced the cost of housing in Sydney and Melbourne up by almost 11 per cent in the year to February, out pacing the broader market (up 6.1 per cent).

That was before the coronavirus outbreak hit global economies. With a recession now on the horizon, the momentum of the market may be disrupted.

A prolonged economic downturn would expose the housing market’s underlying vulnerabilities of high household debt levels, which have saddled Australians for decades, coupled with expensive prices.

AMP Capital chief economist Shane Oliver said this was the worst case scenario. He suspects the country is already in recession and expects negative GDP growth in the March and June quarters, with the chance of further falls in the September quarter.

“It’s the likely recession that we have now entered due to coronavirus related shutdowns that imposes the big risk,” Mr Oliver said. “And the contraction could be deep because big chunks of the economy will be largely shut – tourism, travel, and entertainment with a severe flow on to parts of retailing.”

A short recession with a rise of unemployment to 7.5 per cent would have a more moderate impact on the market, sending it back by 5 per cent. Prices would then bounce back to their current highs.

“We have always concluded that the combination of high prices and debt on their own won’t trigger a major crash in prices unless there are much higher interest rates or a recession. Unfortunately, we are now facing down the barrel of the latter,” Mr Oliver said.

“A sharp rise in unemployment to say 10 per cent or beyond risks resulting in a spike in debt servicing problems, forced sales and sharply falling prices.”

Demand looks to also be clipped, with new data released by the Australian Bureau of Statistics on Thursday showing a slowdown in population growth over the September quarter of 2019.

While the period was unaffected by the coronavirus outbreak, the key reasoning behind the fall pointed to by Housing Industry Association chief economist, Tim Reardon – a softening economy and tighter visa restrictions – are set to exacerbated in coming months by recessions and travel bans.

For now though, the market appears unaffected. Data from property researcher CoreLogic shows the number of homes to be put on the auction block was up this week compared to last, with 2422 dwellings available across all capital cities.

CoreLogic’s head of residential research, Eliza Owen, said the number of sales will be impacted more than prices as a result of falling confidence.

“Transaction activity is likely to be impacted more than market values. As consumer confidence reduces, and labour markets are disrupted, more Australians are likely to put high commitment decisions on hold until there is more certainty around the economy, jobs and household finances,” Ms Owen said.