"This will have profound short term consequences for the housing market," he said.

"As a result, we have materially downwardly revised our expectations for Australian residential property prices.

"It is our view that prices will fall sharply over the next six months."

CBA is expecting the market to recoup some of the losses by the end of the year, but home prices in Melbourne were still set to slide by 8.4 per cent and in Sydney by 6.4 per cent.

"We expect both Sydney and Melbourne to underperform relative to the national benchmark," Mr Aird said.

"Both NSW and Victoria have more exposure to the most heavily impacted services sectors and less exposure to the more insulated sectors such as agriculture and mining.

"In addition, the Sydney and Melbourne housing markets are more impacted by the abrupt temporary halt to net overseas migration as well as the expected fall in foreign demand."

Nationally, the bank is expecting house prices to drop by 7 per cent.


CBA's forecast is a dramatic reversal from its rosier expectation of a 6.1 per cent price growth for 2020 in November last year.

This comes after investment bank UBS forecast a 10 per cent drop in housing values in the coming year in line with their pandemic scenario.

Unemployment, consumer sentiment and migration

Mr Aird said the rapid rise in unemployment caused by the government shutdown is a big shock to the labour market and will put significant downward pressure on home prices.

The surge in unemployment is also expected to weaken rental markets at a time of uncertainty due to government interventions to prevent evictions.

These would act as a major deterrent to property investors over the next six months.

The collapse in consumer sentiment is also a strong portent of sharp price decline, Mr Aird said.


The Westpac/Melbourne Institute Consumer Sentiment report showed the number of households expecting dwelling prices to rise over the next twelve months has plunged to its lowest level since 2009.

"This index has historically had a very strong leading relationship with dwelling prices. If households as a collective expect prices to fall, then they will," Mr Aird said.

The foreign investment and international migration have been reduced to zero due to the border shutdown, which will also have a material negative demand shock to the property market, Mr Aird said.

"It will have an impact on both prices and residential construction," he said.

Best and worst case scenarios

Mr Aird said the spike in unemployment should start falling by the second half of the year, which will limit the magnitude of the price decline.

"This will mean the impact on the property market is immediate, but should not be as long lasting," he said.


"In a best case scenario government restrictions on economic activity could start to be lifted by the end of May.

"If that were to occur, the plunge in economic activity that we expect would not be as large and the impact on the property market would not be as severe, particularly given the extraordinary low borrowing rates currently on offer."

If restrictions are eased and a second round of COVID-19 cases emerge, the hit to the housing market would be more long lasting.

"We would see restrictions return but the hit this time around on the economy and labour markets would be more significant and the damage would be longer lasting," he said.

"Falls in dwelling prices far greater than our central scenario would be plausible. We believe that policymakers will be acutely aware of the risk of this scenario and as a result they will take a cautious approach to reopening the economy."