House prices to fall 10-15% in 2020/2021: NAB's Alan Oster

Since reaching a trough last May house prices have recovered strongly.

The gains have been led by both Sydney and Melbourne which are now 14.3% and 12.4% higher than a year ago. While outcomes across the other capitals have been more mixed - there was evidence of a pre-COVID pickup in momentum.

However, price growth has slowed more recently and activity in the established housing market has slowed sharply. Auction clearance rates have fallen to low levels and turnover has fallen away.

We expect dwelling prices to fall by around 10% this year and decline further in the first half of 2021 before levelling off. The declines will be led by Sydney and Melbourne - but the other cities will not be immune to rising unemployment and slower wage growth.

Alongside the decline in house prices, we expect dwelling construction to continue to fall. The pipeline of work yet to be done remains relatively elevated in NSW and VIC but this will be rapidly eroded with high rates of work done.

Building approvals remain low and are expected to decline further, suggesting little replenishment of the pipeline of work.

Our outlook for the economy more broadly is unsurprisingly significantly weaker than 3 months ago.

We expect quarterly GDP growth will fall by around 7% in Q2 following a small fall in Q1. Coronavirus containment measures have seen a significant fall in consumer and business confidence with an outright restriction on some forms of activity.

Tourism and hospitality are likely to see the largest hits given the nature of measures in place – although the magnitude of the declines in business confidence is likely to see broad-based weakness in investment and hiring across the economy.

In line with this we expect a sharp deterioration in the labour market, with unemployment rising sharply to 11.7% by mid-year and only a partial recovery to 7.3% by end 2021.

While growth will rebound as restrictions are lifted we do not see the level of activity recovering until early-2022.

The labour market will take longer to recover which should see a slowing in wage growth from already low levels. We see high debt levels and slow wage growth continuing to weigh on the consumer.

Weak consumer demand and the sharp deterioration in business confidence will see business investment remain weak - resulting in a similar preCOVID dynamic of weak domestic demand, somewhat offset by support in government spending.

With rising spare capacity in the economy and slow wage growth, we expect inflation to be muted. This will see the RBA keep the cash rate at record lows for an extended period, and a gradual shift to a tightening bias only when inflation appears to be heading sustainably back to target and the there is a significant improvement in the labour market. 

ALAN OSTER is the NAB Group Chief Economist