Unemployment Tsunami to Wash Over Australian Property Market
Disclaimer: This is not financial advice, nor does it take into account your individual circumstances
As the coronavirus economic crisis unfolds and unemployment continues to rise to previously unthinkable levels, most of the commentary on the property market remains relatively positive. With the idea that this crisis will soon pass, generally a popular narrative in the property media.
However, with surveys already showing a large number of jobs being lost and predictions that the worst is till yet to come, it appears there may be a far more negative future ahead for the Aussie property market.
For example:
- Roy Morgan recorded 16.8% unemployment for March
- A Newgate Research survey revealed 21% of workers had been laid off since early March
(Both of these measures predate the impact of the governments Jobkeeper policy)
But perhaps the most concerning picture of the labour market’s future, came from the Grattan Institute. In a report released recently they concluded a total 3.43 million Australians could lose their jobs in the coming months (based on their statistically preferred scenario).
Like any forecast, the following scenario derived from the Grattan Institute's data needs to be taken with a pinch of salt, especially given the rapidly changing and uncertain times we find ourselves in.
In raw terms, not accounting for the inevitable change in the participation rate (people choosing to leave the workforce) and the government’s ‘Jobkeeper’ payment, unemployment would reach 31.8% if that scenario were to be realised.
This is a world away from the Federal Treasury’s estimate of real unemployment (without Jobkeeper in place) peaking at 15%, which now seems an optimistic forecast to say the least.
In terms of headline unemployment, the report concluded that it would peak at between 10% and 15%, depending on how many workers were covered by Jobkeeper and how many choose to give up on the workforce entirely.
However, the scope of this report is limited to a short-term scenario, during which Jobkeeper is in place for the duration.
The reports co-author Brendan Coates also warned that the future beyond the reports forecasting timeline was to face “severe” secondary effects, as households and businesses came to terms with the economy’s new normal.
At first glance that may sound not too bad considering the alternatives, but as always, the devil is in the details.
The Numbers
It is estimated that between 1.37 million (40%) and 2.05 million (60%) laid off workers would be covered by the Jobkeeper program, granting them $750 per week paid by their employer until the 30th of September.
Of those workers not covered by Jobkeeper, 548,000 to 1.235 million would choose to leave the workforce, with the remainder joining the Centrelink unemployment line.
The Unemployment ‘Scrap Heap’
Leaving aside for a moment the extremely damaging consequences of up to 1.23 million more people becoming unemployed, perhaps the most immediate threat to the housing market may be those leaving the workforce.
In the aftermath of the Global Financial Crisis, 59.2% of Americans over the age of 62 and 35.3% aged 50 to 61 who lost their jobs during the crisis never worked again.
If the Grattan Institutes projections are correct and we see similar numbers of Australian’s who lost jobs choosing to leave the workforce (between 40% and 60%), a significant downturn in the property market may result.
Demographic Headwinds and Property
Of all demographics, those approaching retirement in the 55 to 64 age range hold the most investment properties, followed by those are 45 to 54.
This is a key difference when contrasting today’s property market with that of the GFC era.
In 2008, the median baby boomer was 53 years old, at the peak of their earnings capacity and looking for investments to fund their retirement with.
In 2020, the median baby boomer is 65 years old, is either already retired or on the home stretch toward retirement and holds more investment properties than any other age demographic.
Members of this demographic, particularly those who have lost jobs now face a pivotal life choice.
Do they choose to sell their investment properties or downsize their homes in the coming year, ensuring their retirement and standard of living is safeguarded?
Or do they choose to roll the dice with their financial future and hope that capital growth resumes, that somehow they get a better price a few years down the road?
Economic/Virus Crisis = Buyer’s Market
With transactions to potentially collapse to the point where they are no longer statistically significant (as warned by housing price data provider CoreLogic), its clear buyers demand relative to supply may be suppressed for quite some time.
Meanwhile total stock on market in major cities such as Sydney continues to remain elevated, despite some properties coming off the market due to vendor concerns about people potentially infected with Covid-19 inspecting their homes.
This is quite a telling factor, that even in the middle of a global pandemic and economic crisis, this many vendors still want to sell their properties.
Buyers on the other hand are far more cautious about buying a property, as uncertainty about employment prospects and future housing price expectations continues to grow.
Conclusions
With asking prices in Sydney already down 4.36% according to Domain its clear the market is showing clear signs of weakness.
There is little doubt the Morrison Government and the RBA will likely do as much as they possible can to arrest significant falls in the property market, using all manner of policies and incentives.
However, the reality is their resources are finite and will be heavily in demand elsewhere, as the true scope and duration of the coronavirus economic crisis becomes increasingly clear.
While its certainly possible, perhaps even likely that mortgage payment freezes and the Jobkeeper program may offer the property market a degree of protection until their conclusion.
Ultimately the wave of unemployment and workers exiting the job market may be too large to be countered in the longer term, if the estimates about its magnitude are correct.
Eventually it appears the government and RBA efforts may be overwhelmed by the sheer scale of attempting to arrest falls in property prices as the incentive to hold property evaporates, whether due to demographics, unemployment or changing personal circumstances.
