Life is starting to get back to normal, the lockdowns are lifting, there are people in the streets, in fact I went back to one of our favourite café’s on the weekend, but last week we learned we’re in a recession. 
Recently Reserve Bank Governor Philip Lowe suggested this is the largest economic contractions since the 1930s.
So how bad are things going to get? Some are suggesting the recession may even be over already.
That’s what I discuss in this week’s Property Insiders video with Australia’s leading housing economist Dr. Andrew Wilson, chief economist of My Housing Market and we’ll also have a chat about:
- The latest property market data
- Increasing consumer confidence showing up in the stock market and our housing markets
- Falling business confidence
- Who will the new Homebuilder really help
What is a recession?
Sure there is the technical definition of two quarters of negative GDP and while we may not be there yet, but other factors that are recessionary include:
- Falling consumption.
- High unemployment
- Collapsing retail sales
- Declining small business income
So, let’s agree we’re in a recession and that’s been caused, in part, by lack of consumer spending.
Australian’s haven’t been able to get out to the shops and splash their cash, but now that restrictions are easing, it’s likely that more of us will stash our cash waiting for news that we’re through the worst of things.
Despite the many positive signs, such as Australia coming out of its lockdown earlier and better than expected and forecasts that unemployment won’t be as high as first thought and the recession won’t be as deep as some predicted, there is still plenty of bad news to come and this will impact consumer sentiment.
At the same time, business conditions remain poor and business confidence is deeply negative, putting a damper on employment growth.
We can’t stimulate our economy any further allowing interest rate so now it’s up to the government to give incentives, relief and to boost confidence to grease the wheels of industry.
A great start would be to reassure Australian workers that they won’t be left in the lurch in September when JobKeeper, JobSeeker ends, and that appropriate further support will be offered.
Similar reassurances to homeowners and property investors that they won’t fall off of the proverbial cliff in September when the rental and mortgage relief packages are scheduled to end will boost confidence.
Then we need the type of stimulus that will encourage small and medium-size businesses to take more risks, grow, employ more people, and take on more inventory.
A great starting point would be to lower corporate tax rates to give business the extra cash flow necessary to grow as well as offering incentives to employ more people or buy new equipment.
Australia is slipping into recession
Economic activity in Australian contracted by 0.3% in the March quarter of 2020, broadly in line with market expectations, slowing annual growth to 1.4% from 2.2%.
That is the first decline since March 2011.
The Government, the RBA and most economists are now forecasting a contraction in the June quarter in the order of 7% pushing Australia into its first recession (often defined as two consecutive falls in quarterly GDP) since the first half of 1991.
However things are unlikely to turn out as bad as many economists first forecast.
With evidence of an earlier than expected easing in restrictions many believe we’ll see a rebound in the second half of this year.
For example, Westpac has rebalanced their forecast growth profile to:
- –0.3% in Q1;
- –7.0% in Q2;
- +1.5% in Q3 and
- +2.0% in Q4.
Through the year Westpac now forecasted the economy will contract by 4% with a contraction of 7.3% in H1 and growth of 3.5% in H2.
For 2021 Westpac now expects growth of 3%, down from 4%.
The unemployment rate is expected to fall to around 8% by September 2020 (from 9% in June 2020) and hold there in the December quarter despite the expected lift in growth in H2 of 3.5%.
The impact on employment of a lift in demand is expected to be offset by the unwinding of the JobKeeper Payments which will see many workers forced into the unemployment pool and on to JobSeeker.
Business Confidence is low and that’s not good for employment
Business conditions and business confidence remained deeply negative in May – despite a bounce from the extreme lows of April, when the nation was in a partial lock-down (particularly for “non-essential” workers).
That was a key finding from the NAB business survey conducted from May 19 to June 1.
The previous survey was taken from April 23 to 30. 
Business conditions rose from -34 to -24 in the month.
That is still below the low point in the GFC, of -16.5, but above the 1990s recession low of -39.
This bounce in conditions occurred as restrictions started to ease and the economy slowly reopened, albeit a reopening that is uneven across sectors and across states.
Business confidence, having collapsed to a never before seen low of -65 in March, has clawed its way back to be around “recession levels” in May, at -20.
That compares to the lows in the past cycles of, -30 during the GFC and -23 in 1990.
Clearly the situation remains fluid and fast-moving.
The continued easing of restrictions in June will see a further bounce in business conditions.
Who Benefits from the Federal Government’s Homebuilder Scheme?
The recently announced Federal Government Homebuilder package offers a grant of $25,000 for the purchase of new home or unit and renovators and is aimed at supporting new construction and jobs in the construction industry.
In contrast to grants in the past that have only been available to first home buyers, HomeBuilder is available to all owner-occupiers (but not investors), although they must meet the following eligibility criteria:
- You are a natural person (not a company or trust);
- You are aged 18 years or older;
- You are an Australian citizen;
- You meet one of the following two income caps:
- $125,000 per annum for an individual applicant based on your 2018/19 tax return or later; or
- $200,000 per annum for a couple based on both 2018/19 tax returns or later;
- You enter into a building contract between 4 June 2020 and 31 December 2020 to either:
- build a new home as a principal place of residence, where the property value (house and land) does not exceed $750,000; or
- substantially renovate your existing home as a principal place of residence, where the renovation contract is between $150,000 and $750,000, and where the value of your existing property (house and land) does not exceed $1.5 million;
- Construction must commence within three months of the contract date.
All dwelling types (house, apartment, house and land package, off-the-plan, etc) are eligible under HomeBuilder, in accordance with the requirement that the owner-occupier must contract to build a new dwelling or substantially renovate their existing dwelling.
There are no limits on the number of grants, the Federal Government costing the scheme at $688m.
Will it work? Who will benefit?
Despite the size of the incentive ($25,000) being greater than previous Federal grants and aimed at all new home buyers rather than only first home buyers (such as during the Global Financial Crisis), the impact is likely to be less.
Considering the time frames for this incentive and the requirement to commence construction within three months from the date of contract, this Scheme will preclude new apartment projects and most townhouse projects unless construction commencement is imminent. 
On the other hand, it seems to be aimed at new house and land packages in outer suburban greenfield sites and it will benefit regional locations where $25,000 will make a big dent into the cost of a new home.
The minimum budget for a renovation contract of $150,000 means the job would be a substantial renovation – in fact considerably more than the typical kitchen and bathroom renovation.
There is some debate as to whether a household that can afford a $150,000 renovation needs a further $25,000 to add to the budget, but HomeBuilder is likely to expedite renovations that are already being planned.
However, it will be more difficult for renovations, where the process has not yet started as drawing up all the plans and getting approvals through council then engaging a builder by the time HomeBuilder, expires at the end of December will be a challenge.
The $750,000 price threshold for the total house and land value suggests that the Sydney market will largely miss out.
With entry-level pricing in Western Sydney at around $700,000 for new houses on smaller lots, only a limited number of new houses will qualify for HomeBuilder.
Some potential concerns:
- Experience from previous incentive schemes suggests that increased demand for new homes has the potential to push up prices of both the land and construction costs.
- At the same time demand for new dwellings is expected to be pulled forward to take advantage of the incentive before it expires which means that there will potentially be a lull in new home buyer demand in early 2021.
- Are new dwellings really what most first homeowners want? Many want to live in the inner city and middle-ring suburbs of our capital cities
- But a bigger question is do we need extra supply of this type of new housing supply. A collapse in net overseas migration has reduced the demand for new dwellings. Encouraging demand for new dwellings instead of existing dwellings in this environment has the potential to reduce price pressures in the established market.
- Many first home buyers exiting the rental market to purchase a new dwelling will free up a dwelling for rental. If they would have otherwise been in the market for an existing dwelling, then this will also reduce competition in the market place for established dwellings.
- Developers and builders of speculatively built houses and townhouses that are currently under construction may face reduced demand and may have to discount to lure potential buyers seeking to build instead to be eligible for HomeBuilder.
This week’s property data provided by Dr. Andrew Wilson, My Housing Market
Auction clearance rates
Last weekend auction numbers were subdued because of the Queen’s Birthday long weekend.
The preliminary auction clearance rates are reported below, however at the moment in this time of market flux the exact figures are meaningless, and more important is the market trends.
However, we look forward to following the trends as more vendors place their properties on the market for sale by auction.
Remember there’s a 5 to 6 week lead time from when sellers initially engage a real estate agent to sell their property at auction and the final auction date.
New Homes Listing Index
The number of homes newly listed for sale seems to be holding steady, showing vendors are seeing a light at the end of the tunnel and tentatively tipping their toes in the property market.
At the same time the All Ordinaries Index suggests that consumers and institutions can see a light at the end of the tunnel and our stock market has made up a lot of its lost ground.
Home sales
While the turnover in property transactions is very low, with about the same number of properties transacted in a month that we transacted in a week in the past, as the following charts provided by Dr Andrew Wilson show, the Sydney market is showing signs of strengthening.
Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on
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from Property UpdateProperty Update https://propertyupdate.com.au/property-news-headlines-forecasts/
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