27 Jul 2020

A sharp fall in net migration combined with high unemployment numbers will deal serious blows to the country’s all-important residential construction sector as well as the existing housing market, analysts say.

Buried in the assumptions of the July economic and fiscal update is the forecast that migration – for decades a key driver for the nation’s economy – will fall from 232,000 in 2018-19 to just 31,000 in 2020-21 as a result of the ban on international arrivals imposed earlier this year.

Dwelling investment is expected to contract by 16 per cent in 2020-21. That is a major concern for the federal government, which has attempted to stimulate the sector with the HomeBuilder grants for new homes.

The sector comprises 140,000 jobs directly but it has a big multiplier effect: as many as 1 million more related jobs. Treasurer Josh Frydenberg says the official unemployment rate, currently at 7.4 per cent, could hit 9.25 per cent before Christmas.

Those numbers worry SQM Research’s Louis Christopher. A steep fall in migration represents reduced demand for homes, even as a surplus of new homes, begun in the last boom, makes its way into the market.

“It will mean we will have an increased surplus of dwellings looking for an occupier in this current financial year,” he said.

SQM Research estimates 170,000 dwellings will be completed in the 2020 calendar year. Official figures last week show 47,000 dwellings were completed in the March quarter alone

“It’s not going to be good for existing property owners, but good for potential buyers,” Mr Christopher said.

The jobless rate could go even higher – Treasury forecasts 10.75 per cent by December – as assistance is pared back and those who had dropped out of the labour market start looking for work again.

An unemployment rate of 7 per cent or more translates into falling house prices, according to Mr Christopher.

“The higher the number goes, the larger the decline. These numbers are a significant negative for the housing market.”

The prospect of the SQM Research’s bleaker scenario for the housing market – with price falls of as much as 30 per cent, peak to trough – are rising for Sydney and especially Melbourne amid the second wave of the pandemic.

“This is uncharted waters for everyone,” Mr Christopher said. “When I plug in unemployment rates of 9 per cent, when I plug in many businesses closing down, when I plug the banks restricting new lending, then these type of falls are on the cards.”

The July economic update forecasts population growth will remain positive, although significantly reduced by both falling migration numbers and lower fertility rates in response to the weaker economy. Treasury expects population growth to slow to 0.6 per cent in 2020-21, the lowest annual rate of growth since 1916-17.

some of that fall in demand for new housing could be offset by a coronavirus-caused cabin fever

Richard Gibbs View Profile

However, economist Richard Gibbs, a director at Urbis, says at least some of that fall in demand for new housing could be offset by a coronavirus-caused cabin fever, spurring the formation of new households by people who want to avoid being part of larger groupings.

As well, a low debt servicing cost for the federal government – Treasury predicts bond yields could average 0.8 per cent – would provide further support for the housing market, according to Mr Gibbs.

Home owners can be expected to refinance at lower costs, with more taking up fixed interest loans. It could also encourage more first home buyers into new homes, supporting the construction sector.

“It is our best hope for an employment-generating activity in the early stages of the recovery from COVID,” Mr Gibbs said.

Richard Gibbs View Profile