Rising property prices before the COVID-19 pandemic hit are expected to offset much of the drop in prices expected in the second half of this year. 

According to analysis by HSBC, national house prices could end 6% higher by the end of 2020, with Sydney house prices potentially up by as much as 9% and Melbourne 7%. 

But next year, house prices could drop anywhere between 2% and 12% nationally.

The biggest declines are expected in our biggest housing markets, with Sydney house prices predicted to fall between 5% and 15% and Melbourne's by between 7% and 17%. 

The drop in house prices could be even higher if economic recovery is an 'L' or 'W' shape. 

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LenderHome LoanInterest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees LVR Lump Sum Repayment Additional Repayments Split Loan Option TagsFeaturesLinkCompare
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Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of . View disclaimer.

HSBC chief economist Paul Bloxham said rising unemployment and a freeze in migration thanks to border lockdowns were likely to be big drivers of oversupply, driving house prices down. 

"Forecasting housing prices is difficult at the best of times, but at the moment it is particularly challenging," Mr Bloxham wrote. 

"Although interest rates are at record lows, which should support housing prices, at the same time, the COVID-19 economic shock, stalled migration and rising unemployment are set to weigh on housing demand.

"We expect larger declines in housing prices in Sydney and Melbourne than in Australia's other cities, given greater reliance in these cities on migration and foreign students, which have stalled as a result of border closures."

Many economists are forecasting a house price drop of anywhere between 10% and 20% nationally.

Earlier in the month, the likes of Commonwealth Bank and SQM Research predicted a 30% drop in a worst-case scenario.

There are already early signs of prices dropping, with combined capital city house values falling by a 0.20% over the 28 days to May 18 according to CoreLogic. 

"No sign of distressed selling"

Some vendors are already reducing their asking prices but a recent analysis of Domain listings has found there is "little evidence to suggest an increase in urgent or distressed selling across Australia’s capital cities".

According to the analysis, Sydney, Perth, Adelaide and Hobart had a marginal increase in the number of urgent sale listings from February to mid-May "when the full economic shutdown and social distancing restrictions would have been felt".

But Melbourne and Darwin saw no change, and Brisbane and Canberra saw a small decline in the number of urgent listings.

"This suggests home owners are not being forced to sell despite the economic turmoil and rising unemployment created by the current health crisis," Domain economist Nicola Powell said. 

Proportion of urgent sales:

Feb Mar Apr May mid-May Change: Feb to mid-May
Sydney 1.4% 1.2% 1.2% 1.4% 1.6% 0.2ppt
Melbourne 0.5% 0.5% 0.4% 0.5% 0.5%
Brisbane 3.0% 2.9% 2.8% 2.8% 2.8% -0.1ppt
Perth 2.3% 2.2% 2.2% 2.3% 2.4% 0.ppt
Adelaide 0.9% 0.7% 0.7% 1.0% 1.1% 0.2ppt
Canberra 0.7% 0.7% 0.6% 0.6% 0.6% -0.1ppt
Darwin 2.8% 2.7% 2.7% 2.8% 2.8%
Hobart 0.7% 0.9% 0.8% 0.8% 1.0% 0.3ppt

Source: Domain

Ms Powell said the aftermath of the economic upheaval caused by the pandemic could result in an increase in the number of distressed sales, but financial stimulus measures such as JobKeeper and JobSeeker will minimise the number of urgent sales, which will support house prices. 

"If the policies were not in place, the immediate risk to prices would be far greater," Ms Powell said. 

"The longer-term impact could be different, and an uptick in distressed selling is possible once the policies cease. If the JobKeeper subsidy performs as intended and retains jobs, together with economic activity bouncing back, any dramatic increase in distressed selling is unlikely.

"However, those who have lost their business, remain unemployed or underemployed will be at greater risk of defaulting on their mortgage."

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