Commonwealth Bank Release Downturn Scenarios
Updated: Jun 2, 2020
The economic effects of COVID-19 are starting to filter through to the housing market, with more pronounced effects likely in the weeks and months ahead. The Commonwealth Bank recently published data about the length and extent of the possible downturn, with two different scenarios released. According to the base case and best possible scenario, the Australian property market will fall by 11% and begin its recovery phase in 2021. A more prolonged downturn is also possible, however, with prices possibly falling up to 32% and stagnating for much longer.
Australia's largest retail bank is forecasting tough times ahead, it's just a matter of how bad things will get. The Commonwealth Bank have a serious stake in the housing market, with the largest slice of the property pie in the entire country. This single institution accounts for around $446 billion in mortgage debt, which makes its predictions even more sobering. After benefiting from rising capital city prices over recent years, the bank understands the likely outcome of recent lofty valuations colliding with a huge global downturn.
Two distinct scenarios were released in the bank's March Quarter update, with reality likely to fall somewhere in-between. There is a huge discrepancy in the two scenarios, which highlights vast unknowns related to the pandemic and its effects. In the least disastrous scenario, the market falls by 11% over a period of months, picking up slowly in 2021 based on the extent of unemployment and overall economic recovery. These figures are based on an unemployment rate of 8.25% later this year, which is looking very likely.
However, if property prices do plunge 32% under the worst-case scenario, prices will revert to levels not seen for more than a decade. This would eclipse the previous largest fall on record, and potentially shave as much as $300,000 from the median Sydney house price. Under this scenario, 7.1% would be wiped from the Australian economy this year alone. If this all seems a little pessimistic, it's only slightly above IMF expectations and those made by Treasury.
Housing figures will be largely dependent on unemployment numbers, which are likely to slide considerably over the coming weeks and months. Treasury is bracing itself for a 10% peak in unemployment later this year, with numbers improving gradually in 2021 as they return to 6.5% in 2022. The most prolonged Commonwealth Bank scenario is mostly in agreement, with unemployment expected to reach 9% this year, 8.5% in 2021, and 6.5% in 2022.
According to Treasury, the Australian economy will shrink 6% this year, before stalling and growing by the same margin in 2021.
According to the worst Commonwealth Bank scenario, however, this is somewhat optimistic, with the economy continuing to shrink 0.8% next year and growth not returning until 2022. While the worst-case scenario is unlikely by definition, Australia's largest bank has taken out insurance against a major downturn with $1.5 billion set aside to cover the expected rise in job losses and associated bad debts.