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OECD says Australia to be hit hard by coronavirus, as rate cut looms

Maja Garaca Djurdjevic
Maja Garaca Djurdjevic
03 March 2020 2 minute readShare
coronavirus

Australia will be one of the countries most affected by the economic fallout of the coronavirus, the OECD has said in its special research paper on Monday, in which it characterised the virus as the greatest danger to the global economy since the financial crisis.

“The adverse impact on confidence, financial markets, the travel sector and disruption to supply chains contributes to the downward revisions in all G20 economies in 2020, particularly ones strongly interconnected to China, such as Japan, Korea and Australia,” the OECD said.

It explained that Australia should look at stimulus measures, including additional precautionary reductions in policy interest rates, to restore confidence and reduce debt-servicing costs.

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The Reserve Bank is due to deliver its interest rate verdict later today, amid increasing expectations that it will opt for an emergency cut to help protect the economy.

‘Return of macroprudential measures highly likely’

Given the amplified risk to the financial system, on the back of both the devastation caused by the recent bushfires and the spread of the coronavirus, an expert has said that the likelihood that the Australian Prudential Regulation Authority (APRA) will reintroduce macroprudential measures is increasing. 

 

Analysis by RiskWise Property Research has found that while property markets across Australia, particularly in Sydney and Melbourne, are recovering well, the recent bushfires have had a material impact on a large number of areas, increasing the likelihood of the reintroduction of macroprudential measures.

In addition, the implications of the fires and the coronavirus on the economy are yet to be fully determined, but are posing a serious threat to already poor economic growth.

RiskWise Property Research CEO Doron Peleg said unemployment, under-employment and spare capacity in the labour market also noticeably increased in January 2020, leading to further speculation the RBA will undertake another interest rate cut before July.

“The recent bushfires will have a major short-term impact on property prices in affected areas, and this will increase the risk in many regional areas given the possibility of future occurrences,” Mr Peleg said.

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“This impact will depend on the actual effect of the fires as well as the normal projected demand for residential property before they occurred and their location in relation to employment hubs.”

Mr Peleg cautioned that improved buyer sentiment and auction clearance rates well above 70 per cent in Sydney and Melbourne could have a negative impact on housing affordability, especially given the undersupply of family-suitable properties relative to demand driven by population increases — the biggest issue in the Australian property market since mid-last decade.

On the other hand, he explained there is still a high level of supply of rental properties in some areas, which has had “a very material impact” on changes to dwelling prices of family-suitable properties versus properties unsuitable for families, particularly in high-supply areas.

“Obviously, low out-of-pocket expenses for property investors are well connected with a noticeable increase in their activity. Consequently, it is expected that investor activity will further increase with a direct impact on auction clearance rates and dwelling prices,” he said.

“The recovery of the Sydney and Melbourne markets will also mitigate the risk of negative equity for properties purchased during the downturn, as dwelling prices will reach a new peak.

“However, properties that were settled following an off-the-plan contract with LVR of 90 per cent or more still carry a high level of risk of negative equity. Increased levels of unemployment and under-employment increase the default risk in some markets.”

Mr Peleg warned that units, particularly off the plan, still carry a high level of risk of significant price reductions.

“Areas with high unit oversupply carry a very high risk and this is still a major issue in some property markets,” he said.

“In addition, the reputational damage and impact of the recent construction defects of high rises increases the risk that demand for both new and existing high-rise properties will fall as their main buyers, investors, look elsewhere, e.g. low-rise buildings or freestanding houses.”

OECD says Australia to be hit hard by coronavirus, as rate cut looms
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Maja Garaca Djurdjevic
Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of My Business. 

Maja has a decade-long career in journalism across finance, business and politics. Now a well-versed reporter in the SME and accounting arena, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies and enabling citizens to influence decision-making.

You can email Maja on [email protected] 

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