Spiralling unemployment and falling immigration outlined in the Treasurer’s economic update are likely to cast the greatest shadow over residential property in the months ahead.
If anything, industry predictions that house prices might fall 10 per cent further in the major cities are most likely optimistic.
As the continued extensions of support programs mask the reality of strained household finances, the update added yet another support extension with the deadline for the early superannuation release scheme moved out from September to December.
However, the sliding level of key support payments such as JobKeeper will now cut straight into the ability of borrowers to repay mortgages. Treasury expects unemployment to peak at 9.25 per cent by December.
Moreover, despite a range of first home buyer grants at federal and state level, Treasury estimates offered a very bleak forecast for dwelling commencements which are set to drop by minus 16 per cent over the next year.
Property investors who have been struggling with softer prices and lower rental yields have already been exiting the market, while one third of the mortgage deferrals in the banking system relate to investment mortgages.
The update also offered a clearer picture of the serious impact residential property prices are going to face from the absence of strong population growth, which has underpinned the residential market for decades.
As Treasury numbers suggest, the population growth forecast for next year at 0.6 per cent is going to be the weakest since 1917!
The prospect for any improvement in population outlook are poor.
Treasury says: “Future migration levels remain highly uncertain, due to the path of the pandemic and the nature and duration of measures taken to contain its spread at home and abroad.”
Mixed picture for sharemarket investors
Meanwhile, the update presents a mixed picture for sharemarket investors. Though largely underpinned by low rates and bullish sentiment on Wall Street, large sections of the ASX remain vulnerable to earnings downgrades and the shrinking of JobKeeper payments.
We have already seen a number of mid-cap and small-cap stocks show how important JobKeeper payments have been to ongoing operations.
Trucking company, K&S Corporation issued earnings guidance earlier this week that showed the ASX-listed group expects its next annual profit to be between $15m and $16m. However, the company also revealed it had received $12m in JobKeeper payments.
Broking analysts will have to factor in the sliding level of JobKeeper payments feeding into the results of many smaller companies to get a more accurate picture of the real trading patterns in the months ahead.
In contrast, Treasurer Josh Frydenberg confirmed the strong outlook for the iron ore majors in his presentation of the update.
The Treasurer said that although some problems in Brazil had been advantageous to local producers, a resurgent demand from China had also been crucial to the very strong prices in the iron ore sector, which have buoyed BHP, Rio Tinto and Fortescue Metals Group.
The spot iron ore price is currently at $US105 a tonne, almost double the $US55 a tonne assumption made in the Mid Year Economic and Fiscal Outlook issued by Treasury at Christmas last year.
Nonetheless, the Treasury has left its $US55 a tonne assumption unchanged in the latest update.
With few in the market estimating iron ore to drop anywhere as low as $US55 the assumption gives the government one pathway to delivering an upside surprise in the October budget.
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