‘Sharp rebound’ expected for housing: La Trobe Financial

Mr Andrews noted that the COVID-19 pandemic is likely “the first time since the space race” that the world has come together to focus on one issue, which has wreaked havoc on stock markets and economies globally.

However, the CIO highlighted his confidence in the ability of the Australian economy to bounce back once the immediate threat of the virus has passed, making particular note of the immense resilience previously seen in the Australian housing market.

While the housing market is likely to take a hit during the period of nationwide lockdown measures, and the mandatory cancellation of in-person auctions and open homes, La Trobe Financial estimates that once those measures are relaxed, the housing market will experience a “sharp rebound”.

According to Mr Andrews, there is “little doubt” that housing sales activity will “slow dramatically” throughout the month of April and beyond; however, he stated that housing sales prices throughout this period — of up to six months — are “not likely to be representative or particularly useful”.

“Fundamentally, as we’ve said before, house prices tend to be less volatile than equity markets because, of course, housing is not just an investment, it’s also an instant essential consumption item,” Mr Andrews said.

He noted periods in the past in which the housing market has responded negatively to broader economic conditions, including the global financial crisis in 2008 and the 2017–2019 “credit squeeze”.

“In both cases, there was an initial drop of around 10 per cent, [where] the largest peak-to-trough observation in that period was Sydney in the 2017–19 period at 14.9 per cent retracement.

“In both cases, that was followed by a sharp rebound, as more normal market conditions re-emerged… So, that is a really good baseline for our thinking around the house prices.”

The bigger picture

Having faced financial upheavals in the past, including the global financial crisis, Mr Andrews stated that as a country, “we know what we’re facing, and we have some idea of what we need to do”, although the only current unknown is how long it will take for the pandemic to pass.

La Trobe Financial anticipates that the economic effects of the virus will continue to be seen into the second and third quarter of 2020, while the GDP will see a hit of up to 6.5 per cent.

Mr Andrews noted that the unprecedented co-ordination between governments both in Australia and overseas, as well as the settling of both economic and health conditions in China, is positive news for Australia’s domestic economy as well as the employment market.

“Everything is pointing to there being an incredibly sharp drop-off in economic activity which is no surprise to all of us who are now living various modes of self-isolation,” Mr Andrews said.

“However, our financial system is strong, as Goldman Sachs pointed out, and the epicentre of temporary job losses is in services.”

Mr Andrews noted that these service jobs are “fundamental” to the domestic economy, and “they can, and they will, come back online”.

“As soon as the disease progression allows, for this reason, it is a reasonable base case to assume that the eventual rebound, as we see some positivity around developments in the coronavirus, will be strong, and sharp as well,” he said.

Stimulus measures ‘will not stop here’

In response to the devastating effects on small businesses and casual workers, the federal and state governments have announced multiple stimulus measures, to which Mr Andrews praised the nation’s leaders for their “unprecedented co-ordination” across the different levels of government and regulatory bodies.

He noted that the current federal stimulus of $189 billion is “confidence inspiring” at around 10 per cent of GDP. However, La Trobe Financial anticipates that further expansions of the stimulus packages will be necessary as the seasons change in Australia.

“In our view, the stimulus measures will not stop here, as we head into winter here in Australia and the flu season, you can be sure that there will be more announcements about ‘building a bridge to the recovery’, to use Treasurer Frydenberg’s language.”