What next for Australian Property Markets as the COVID-19 pandemic continues?
Following on from commentary earlier this year, the Australian Property Institute asked some of Australia’s most experienced commentators to update their predictions for the property market, as COVID-19 continues to have impact across the country.
The Australian Economy
We asked Besa Deda, Chief Economist at St. George, to talk about the impact of COVID-19 on the overall economy.
Out of nowhere, COVID-19 has caused the biggest economic downturn since the 1930s. As more data becomes available, the complexity of the path to recovery is being revealed. Like traffic following an incident on the road, the economy is going to be in the slow lane for some time. The pace of recovery will be determined by consumer confidence – confidence that the pandemic is being well contained and that the economic outlook is improving.
The usual candidates for the shape of economic activity following a shock are: the letter U, indicating a gradual recovery, the letter L (in the downturn for a long time), V (a quick snap back to pre-crisis conditions) or W (double-dip recession).
However, we anticipate the recovery will be a back-to-front J shape. The inverted J illustrates an initial recovery after hitting bottom, after which the economy settles into an extended period of bumpy, sub-par growth. We think the J shape reflects the fact that it is likely to be quite some time before we see unemployment as low as 5% again and a long time before we see the economy fully recover and grow at (or above) trend (of around 2.6% per annum). It also accounts for the risks of further outbreaks and lockdowns, as highlighted by Victoria recently.
National accounts data published last month revealed the economy shrank 0.3% in the first quarter of this year. This was the first contraction in nine years and sets Australia up to record its first recession in 29 years. The largest fall in GDP in this downturn will have occurred in the June quarter and we expect this contraction to be around 7%. Output this calendar year will be sharply weaker; we anticipate around 4% weaker, before growing by 3% next year. The good news is the period of contraction may be relatively short and limited to the first half of this year, although the Victorian situation raises the risk it could be longer.
Although the COVID-19 crisis has plunged the world into its deepest downturn since the Great Depression, the impact in Australia to date has not been quite as profound as first thought, due to our success in suppressing the virus. We reopened the economy earlier than expected, therefore the downturn has not been as deep. The complication of course, is the uncertainty, including setbacks such as the current spike in Victorian infections. There are also risks associated with stimulus measures ending. The recent decision to extend the JobKeeper scheme, albeit in a refined form, is a positive development. JobKeeper has helped mitigate the rise in unemployment.
The unemployment rate rose to 7.4% in June – the highest level since late 1998. Without JobKeeper the unemployment rate would be far higher and we believe it has further to rise. We see the peak being at around 9% later this year. The participation has fallen dramatically since the pandemic hit, despite some recovery in June. If we assumed the participation rate stayed the same, the unemployment rate would have been 11.4%. You have to go back more than 40 years (beyond the data available) to get an unemployment rate that high.
Rising joblessness is contributing to consumer caution. The Melbourne Institute and Westpac Bank Consumer Sentiment Index for Australia indicated that consumers are pessimistic about the outlook. After partially recovering in May and June, consumer confidence fell again in July, driven by worries about rising infections in Victoria and NSW.
Consumer caution is hurting traditional bricks-andmortar retailing, especially in the CBD. Online spending has accelerated amid the pandemic. But the outlook over the next few years for retailing remains a soggy one with higher unemployment and household incomes under pressure.
Higher unemployment will also soften the demand for office space, as unemployment rises. Demand is also likely to be softer because many employers will find that it is cheaper to continue having staff work from home, even after the pandemic passes. The weaker demand for office space will partly be offset by the end of hotdesking. Older buildings may witness higher vacancy rates and may become white elephants, especially in the CBD.
The World Health Organization has indicated that a vaccine readily available to the world is still 2.5 years off. Even if a likely candidate were found, testing for efficacy and safety still needs to be done. So, in reality we are likely to have to learn to live with the virus for some time. People will have to continue to practise social distancing and the pandemic will cast a shadow for some time.
If there is a silver lining, it is that some of the ways COVID-19 has changed how we work and how we live are for the better. It’s paving a way for people who may previously have been required to commute to work, or who have previously been denied working from home options. Employers are becoming more flexible and this should also benefit people living in regional parts of Australia.
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