Household finances face a serious impact in the wake of the coronavirus shutdown, economists have warned, as loss of earnings, falling house prices and job insecurity combine to reshape the economy in a way not experienced by Australians for decades.
Official figures released on Thursday showed that unemployment had risen to a “shocking” 6.2% in April, and with the jobless rate likely to rise until one in 10 Australians are out of work, a fundamental shift is occurring in the economy.
Although the reported rise in unemployment was not as bad as some expected (more than 8% was the consensus figure) and there remains hope for a swift recovery, the loss of income marks a serious blow to the economy.
Craig James, chief economist at Commsec, said the fall in jobs masked the future loss of income for many Australians and he suggested that the government might have to extend its jobkeeper wage programme and other handouts to keep people afloat.
“People have lost income and there is little hope for a lift in wages in the months ahead,” he said on Thursday. “Add in the deferral of dividend payments by listed companies and little or no interest income and there may be scope for ‘top up’ cash handouts by the government.”
Falling house prices are another threat to the financial outlook for many households when added to loss of incomes, with the Commonwealth Bank issuing a worst-case scenario on Wednesday that could see 32% lopped off the average value of a home. The prediction was in line with similar war-gaming study from NAB, although the Commonwealth’s base-case is for prices to drop 11% over the next three years.
Analysts at UBS said on Thursday that almost half of Australia’s workers are on wage subsidies, 10% of homeowners are deferring payment of their mortgages and 15% of small businesses are deferring loan repayments.
If the economy has not returned to normal when the “adrenaline hit” of subsidies ends in the spring, households and business face a crunch point along with the nation’s banks.
“Given the extent of the downturn it is probable that many corporates and households will fail,” UBS analysts said.
Economists at JP Morgan believe Australians lack enough “recession experience” because last time the country endured a slump, which was in 1991, a majority of current population (62%) had yet to reach adulthood.
So rising unemployment, loss of income and falling house prices “will induce greater change in household behaviour” and higher saving and lower borrowing will replace the debt splurge that has characterised Australian household finances.
“In the absence of strong incomes growth, both of these factors imply a lower long-term rate of household consumption growth,” says Sally Auld of JP Morgan, who also throws into the mix falling immigration, a worsening relationship with China and higher government debt.
However, there was cause for optimism in some quarters with Cameron Murray, research fellow specialising in property and resources at the Henry Halloran Trust at the University of Sydney, arguing that house prices could weather the storm created by the pandemic.
He believed it was plausible that prices could rise 5% over the next 12-18 months because of investor demand buoyed by ultra-low interest rates that, as JP Morgan forecasts, will remain in place for some time to come.
“If buyers are back, if banks lend at less than 3% to investors, if foreign buyers come back, if government comes in with more stimulus for first-time buyers, then prices will come back,” says Murray.
While rising prices do little to help those who might be hoping for a drop in prices to enable them to buy themselves, it was also possible the crisis and sustained levels of interest rates below 3% could shift the balance towards buying rather than renting in some cases.
Pete Wargent, a buyer’s agent, agreed and noted that although the unemployment numbers were “terrible” the correlation between rising unemployment and lower house prices was weak.
“If you look at the early 90s recession and the aftermath of the GFC you can see that prices went up. One reason is that rates tend to be low. You can now get a loan for 2.19% and that is going to tilt the balance to where it’s cheaper to buy than to rent in some cases.
“The top end will be hit by lack of confidence and borrowing capacity but lower end might be ok if the government comes in with more stimulus.”
