- The Commonwealth Bank has revealed the different property scenarios it is considering as part of an economic downturn.
- Its base case has worsened slightly, expecting 11% falls if a speedy recovery commences in 2021.
- If the downturn is prolonged however, and the recovery not forthcoming, it expects price falls as great as 32% are possible.
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It’s possible Australia could have a real property price crash on its hands, the country’s largest retail bank has warned.
While assuming a downturn would shave 11% off house prices nationally, the Commonwealth Bank has projected a prolonged downturn would threaten to smash property values by nearly a third, at 32%.
If it were to pass it would eclipse the previous largest fall on record, seeing lofty valuations return to levels not seen for more than a decade, and potentially shaving as much as $300,000 from the median Sydney house price.
Revealing the simulation in its March Quarter update, released to the ASX on Wednesday, it’s a serious warning from the bank which holds the largest slice of property pie in the country, at around $446 billion in mortgage debt.
With it’s a near certainty Australia will enter a recession, it’s the duration of the downturn and the se of the proceeding recovery that remains a matter of contention, and the difference in whether we see the house price index (HPI) fall 11% – its current base case – or if they drop like a ton of bricks.
Under the former scenario, unemployment would average at 8.25% this year – Treasury is bracing itself for a 10% peak – before gradually returning to 6.5%, above pre-crisis levels, in 2022. It assumes the economy will shrink by 6% this year, before growing by the same margin in 2021.
But property prices could plunge 32%, according to CBA, if that downturn is deeper and the recovery slower. Under this worst-case scenario, 7.1% would be wiped from the Australian economy this year – only slightly above IMF expectations – but would largely stagnate in 2021 rather than snap back.
Instead, the economy would continue shrinking 0.8% next year, with just modest growth in 2022. Unemployment meanwhile would average 9% this year, 8.5% the following year, before settling down to 6.5% in 2022.
In its update, the Commonwealth Bank revealed its provisioned $1.5 billion to cover the rise in bad debts it expects to take on as part of the economic downturn.
While startling, the figures aren’t beyond the realm of possibility, as vacancy rates surge. The National Cabinet may have begun winding back government restrictions with a view to return to business as usual by July, but the timeline of its three-stage plan hinges on no new major outbreaks of COVID-19.
With no vaccine yet ready to go, and with a failure to contain the virus likely to end in even more costly restrictions, what the path to economic recovery and business normalcy will look like remains unknown.
At any rate, it looks like it is quickly becoming a serious buyer’s market.