APAC / Consumers/retail / Global / Property

Property price uncertainty has the big banks preparing for the worst

Click on the image to see the CoreData COVID-19 Pulse Check Dashboard

Despite initial forecasts for another strong year, the reality of an unprecedented economic shutdown has residential property teetering close to the edge. 

Beginning 2020 with forecasts for a 7 to 11 per cent rise in prices, COVID-19 restrictions and spiking unemployment have potentially plunged the economy into recession, with new forecasts ranging from a flat or moderate fall in prices this year, to a more significant 20 per cent or even 30 per cent collapse.

Investors have welcomed a recent influx of information, with the largest US stocks (i.e. Tesla, Facebook and Alphabet (Google)) reporting first-quarter results, and the big four Australian banks beginning to share their half-year performance. 

The big technology stocks, or FAANG as they are often called, have reported strong performances, but the local banks paint a much less optimistic picture.

NAB, Australia’s largest business bank, began the week with an early report of its half-year results, choosing to simultaneously prod the market for $3.5 billion in new equity, while choosing to pay a 30 cent per share dividend (down 64 per cent from last year). The bank also more than doubled its impairment charge in preparation for bad loans, raising it almost 160 per cent to $1.16 billion

NAB’s COVID-19 preparations are primarily established using an assumed base-case scenario which includes a 10 per cent fall in property prices this year, followed by a 2.6 per cent recovery in 2021. The hypothetical severe case is a stark comparison, suggesting a possible 20.9 per cent fall in 2020 and continued 11.8 per cent decline in the following 12 months. 

ANZ, the smallest of the big four, followed suit in taking a $1 billion impairment charge in anticipation of COVID-19 related bad loans, but chose to also take the more prudent approach and defer its interim dividend to be reviewed later in the year.

Local investors more optimistic

Regulators welcomed the cautious behaviour of bank executives. However, CoreData’s latest COVID-19 Pulse Check reveals a more optimistic outlook amongst local investors. 

The Investor Sentiment Index rose again this week, with the index, which is weighted from a pessimistic -50 to optimistic +50, rising to a more neutral -10.9 from -19.2 the previous week. 

Some resilience among property owners is also becoming apparent, with only 5 per cent of Australians taking up the mortgage repayment holiday made available by the big banks. Similarly, less than one in five (18.0 per cent) expect to seek rent reductions within the next 12 months, and fewer say they have already done so (8.2 per cent). 

Two in five (42.9 per cent) investors expect direct property to be flat or perform better in the next quarter, up from less than one in three (29.9 per cent) when CoreData began our research in mid-March. 

Growing optimism may be partly attributable to government stimulus, with three in four (77.7 per cent) describing the Federal Government response to COVID-19 as good or excellent. 

The JobKeeper payment, which begins to take effect next week, may be helping to alleviate unemployment concerns, with more than half (55.0 per cent) of Australians not worried about losing their job as a direct result of the virus. 

Leaked documents also show the NSW Government has plans to potentially spend $500 million buying up the state’s spare housing – providing an additional backstop behind local property prices.

Uncertainty in the year ahead

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As the situation continues to improve, more Australians are expecting their household’s financial position to get better in the next 12 months (34.3 per cent, up from 12.4 per cent a month ago), with a growing number likely to purchase a new investment product in the next quarter (23.7 per cent, up from 11.4 per cent).

While the big banks appear to be preparing for financial Armageddon, many investors are becoming more optimistic about short-term prospects, with Australia seemingly having avoided the worst of the virus thus far.

But with unemployment still tipped to reach 10 per cent in the June quarter, and real unemployment likely to be much higher than official figures, there lingers a strong possibility of a significant crash in property prices. This is especially true given Australia’s remarkably high level of household debt, which had led some to describe the property market as “a house of cards”, even before the COVID-19 pandemic.

With much of the country’s economic success predicated on strong asset prices and sustained foreign investment, it becomes clear why the banks are approaching the next 12 months with a significant level of caution.

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