Photo by Javier Quiroga on Unsplash
A new report has found a 'worst case' scenario for COVID-19 could have a devastating effect on house prices.
Investment bank UBS said if the pandemic continues into September and infects 16% of the global population at higher fatality rates, house prices could plummet by up to 20%.
However, a 'moderate' scenario, where infection rates peak in May and the virus is contained within the next six weeks, would see house prices rise 5%.
An 'intermediate' scenario, where there are three to four times as many infections as the flu and a fatality rate up to ten times higher than the flu, with a June peak, would see house prices fall by 5%.
In its report, UBS said it was difficult to forecast which outcome was the most likely but moderate should be the goal.
"As the virus spreads, the 'moderate' may be viewed as a best case/upside scenario that is consistent with the current global position stabilising, such as coordinated global approach to contain the virus is successful," it said.
"The intermediate scenario may be a revised "likely/base case" and the pandemic a 'downside case' where a global recession occurs."
Want to earn a fixed interest rate on your cash? The table below features term deposits with some of the highest interest rates on the market for a six-month term.
Rates based on a $50,000 deposit for 6 months. Rates correct as of May 24, 2022. View disclaimer.
AMP Economist Shane Oliver said the fluctuation of house prices was dependent on how deep a recession there was and how far unemployment rises.
"A sharp rise in unemployment to say 10% or beyond risks resulting in a spike in debt servicing problems, forced sales and sharply falling prices," he said.
"This could then feedback to weaken the broader economy as falling home prices lead to less spending and a further rise in unemployment and more defaults and so on.
"This scenario could see prices fall 20% or so."
Housing market activity unlikely to rise
Tim Lawless and Eliza Owen, Research Heads at CoreLogic, said a Reserve Bank (RBA) cut usually saw an increase in house prices, but this was unlikely to be the case with the latest one.
"However the current situation of extreme uncertainty and economic fragility makes it difficult to expect housing market activity to lift against the historically low cost of debt," they said.
"As the coronavirus pandemic broadens, and the probability of an Australian recession increases, consumer confidence is trending lower from an already weak position.
"This will likely weigh on high commitment consumer spending decisions, such as buying or selling a home."
They said transaction activity was likely to suffer as buyer and sellers retreated due to the uncertain times we're experiencing.
Additionally, they predicted a rise in unemployment would see more households struggle to make mortgage repayments and fall into arrears.
"Of course this outcome is contingent on the impact from coronavirus only lasting several months; a more sustained economic downturn would likely see households struggling with higher unemployment and underemployment."
"Considering that household debt levels are close to record highs, a material weakening in labour markets would likely see a substantial rise in mortgage arrears and distressed properties entering the market."
Banks are likely to offer a pause on home loan repayments for those suffering financial hardship due to the virus - NAB has already done so.
Labor and the Greens have also called for action such as a moratorium on all foreclosures and evictions for single family homeowners, like the plans recently passed in the likes of the UK and US.
Disclaimers
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.
Latest Articles
- How can I get on the same page about money with my partner?
- How does a professional twenty-something spend their money in Melbourne?
- How will a Labor Government affect my personal finances?
- RACQ Bank launches green car loan
- ANZ moves out of lockstep with RBA, increases variable home loan rates
Latest News
How does Labor's win affect the housing market?
May 24, 2022
Top 20 suburbs where rent is tipped to rise next
May 19, 2022
Be Savings smart.
Subscribe for free money newsletters.
to the Savings Privacy Policy