Rental market crash tipped to fuel house price drop

The plunge in the rental market in inner-city Sydney and Melbourne will accelerate the drop in property prices, says Morgan Stanley.

Morgan Stanley is expecting a broad downturn in housing.

The plunge in the rental market that is ripping through the inner-city suburbs of Sydney and Melbourne will accelerate the drop in property prices, says Morgan Stanley, which is warning of price falls of up to 15 per cent.

The warning came as property researcher CoreLogic cited rising job losses, fewer international students and a collapse in tourism as piling pressure on the home rental market.

More hoteliers are switching their properties to longer-term accommodation, boosting the number of rental properties at a time when demand and prices are dropping.

The collapse in hotel demand due to COVID-19 has prompted Singapore’s Frasers Hospitality to offer cut-price short-term leases of 3-12 months on hotel rooms in its portfolio.

Luxury CBD hotel rooms at Fraser Suites Sydney, Fraser Place Melbourne, Fraser Suites Perth and Capri by Fraser Brisbane will be tipped on to the rental market.

This will add to the jump in rental properties in once highly sought-after inner-city suburbs of Melbourne and Sydney, with supply rising by 36.2 per cent and 34.1 per cent respectively, according to CoreLogic.

Morgan Stanley joins major bank economists and investment house AMP Capital in taking a cautious approach to housing, with researcher SQM also predicting falls of up to 30 per cent.

“We expect a broad housing downturn, with the rental market in particular likely to weaken, as higher unemployment and a reduction in net migration both work to reduce housing demand, pushing vacancy rates higher and rental prices lower,” Morgan Stanley said.

The bank’s equity strategists said this would flow through to house prices and they expected a decline comparable to the previous downturn of 10-15 per cent.

“Price declines are likely to be gradual in the near-term given the significant amount of support being provided by the government and banks,” Morgan Stanley said. “However, given our expectation that unemployment is likely to stay elevated for some time, these measures will only delay housing stress and forced selling to later in the year,” the bank added.

House prices grew in April, albeit by just 0.2 per cent, which was the weakest in the last nine months. Turnover was down sharply, and significant falls in housing sentiment suggest further declines to come.

“We expect the rental market to be a key channel of weakness, with any forced selling only later in the year as policy support is eased,” Morgan Stanley said.

Home prices remain 9.7 per cent higher than they were a year ago, and just 1 per cent below the 2017 peak. But sentiment is dropping fast.

Auction volumes and clearance rates have fallen significantly over the past few weeks as lockdown measures were put in place across the country.