Be prepared for the COVID-19 housing slump

Dominique Grubisa
Dominique Grubisa

Published 12:03 pm 14 May 2020

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While the effects of the coronavirus pandemic on the housing sector haven’t been as immediate as on retail and hospitality, they are coming – and they will reshape the residential property landscape. Preparing now will give you your best chance of picking up a bargain and building your wealth in the years ahead, writes DGI CEO and Founder Dominique Grubisa.

You could be forgiven for thinking that Australia’s housing market has been left largely untouched by the COVID-19 crisis. Figures this month showed sale prices across the country had more or less held steady during April despite hundreds of thousands of Australians losing their jobs and countless businesses closing. 

But don’t be fooled. While the impact of the coronavirus crisis is taking a little longer to percolate through to the housing sector, it is coming. Experts from the major banks, from the Reserve Bank of Australia and from property analyst CoreLogic all argue that a surge in housing stress, foreclosures and forced sales in on the way in the coming 6 to 12 months.

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Falling rents is a sign of what’s to come

For those with observant eyes, the early signs of the coming property downturn are already apparent. With Australia’s international borders closed, the arrival of new migrants, foreign students and holidaymakers has ceased, slamming the rental market in the capitals. Properties formerly used as Airbnb’s are being put on the general market, creating a worsening glut in rentals. While the national vacancy rate has leapt to 2.5 percent, figures from CoreLogic show rental vacancy listings surged about 35 percent in both Sydney and Melbourne at the end of April as landlords searched frantically for tenants. Rental asking prices have already plunged 10 percent in Sydney’s posh eastern suburbs and 17 percent in its CBD.

A lack of rental income is likely to put many landlords under stress. This will add to the enormous stress ordinary mum-and-dad homeowners are feeling with thousands losing their jobs or having their income slashed. While temporary ‘mortgage holidays’ from the banks may help for a while, this will eventually come to an end with devastating impacts.

Potential 30-percent plunge

Just ask the National Australia Bank. In a chilling hint of what may be coming, it recently warned that house prices could plunge more than 30 percent over two years in a worst-case COVID-19 scenario. Under the bank’s modelling, prices could fall 20.9 per cent in 2020 and a further 11.8 percent in 2021, before rising 2.5 per cent in 2022. The Commonwealth Bank recently backed up this prediction with its own warning of a potential 32 percent plunge.  

The Reserve Bank of Australia, meanwhile, reported in its April Financial Stability Review that predicted climbs in unemployment and falls in property prices would have a major effect on the number of households experiencing mortgage stress. The RBA says for every one percent rise in the unemployment rate, the proportion of homeowners falling behind on their mortgage payments may rise 0.8 percent. And even a conservative 10 percent fall in property prices would push those at risk of defaulting to 6.5 percent.

Research from consultancy firm Digital Finance Analytics suggests a chilling 38 percent of Australian households were facing mortgage stress in April. This represents 1.4 million households, with the number likely to climb to 41 percent by August. A study by the firm, based on household surveys across the country, found that Tasmania was the worst hit state for mortgage stress, although the remainder of the states weren’t far behind.

States and territories worst affected by mortgage stress

  • Tasmania
  • South Australia
  • Western Australia
  • Victoria 
  • ACT

Source: Digital Finance Analytics

Postcodes most at risk of mortgage stress and default (April)

What this all means is that over the coming year or so, it is very likely that many thousands of Australians will be forced to sell properties in a falling market – and for prices far below their previous expectations.

Time for the brave to act

While it’s a bleak scenario for those who will lose their houses, there is an upside for smart investors and those prepared to buy in a falling market. It was the US financial guru Warren Buffett who advised investors to be fearful when others are greedy and greedy when others are fearful. 

These words were surprisingly recently echoed by NSW Premier Gladys Berejiklian who remarked it may be a great time to consider buying property in her state, “For those who want to get into the market for the first time, it will be a buyer’s market for the next little while,” she said.

So, don’t panic and join the throngs abandoning the property market as the economic fall-out of the pandemic sets in. Keep calm and capitalise on the situation and you stand your best chance of building considerable wealth.

Distressed Property

Good Debt Vs Bad Debt With Dominique Grubisa - DG Institute

Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

About DG Institute

Founded in 2009, DG Institute strives to empower everyday Australians to grow and protect their wealth. Our goal is to provide direction, motivation and inspiration to our clients and help them perform at their very best. We do that through our professional services, in addition to teaching them how to grow their wealth through property and business education.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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