While the real estate market has held up relatively well so far, there are some rough seas ahead as price falls pick up.

Property prices fell 0.7% nationally in the month of June, almost twice the 0.4% fall recorded for May, according to the latest CoreLogic data.

It’s far from the 10% drops forecast by the Commonwealth Bank and others at the outset of the COVID-19 crisis, with CoreLogic head of research Tim Lawless noting an abundance of support had so far constrained cumulative falls in the capitals to 1.3%.

“A variety of factors have helped to protect home values from more significant declines, including persistently low advertised stock levels and significant government stimulus,” Lawless said.

“Additionally, low-interest rates and forbearance policies from lenders have helped to keep urgent sales off the market, providing further insulation to housing values.”

Nor is further stimulus guaranteed, with support measures set to end in the coming months.

“While it is encouraging to see lenders have recently hinted at an extension in their repayment leniency policies, the government stimulus will eventually taper and banks will require borrowers to repay their loans,” Lawless said.

“The longer-term outlook for the housing market is largely dependent on how well the economy is tracking when these support measures are removed,” he adde.d

While Sydney and Melbourne’s prices remain 13.3% and 10.2% higher over the last 12 months, they’re both now witnessing the sharpest falls, with the upper end of the market proving the weakest.

“Higher value markets tend to be more reactive to changes in the environment, having led both the upswing and the downturn over previous cycles,” Lawless said, noting the top market quartile had fallen 1.7% across the capital cities in three months.

Melbourne, smacked by another 1.1% drop in June, has seen 2.3% wiped off prices this quarter. Perth fell by the same margin in June, while Sydney prices fell 0.8%.

Elsewhere, it’s been a mixed bag. Brisbane, Adelaide and the regions declined modestly over the month, while Hobart, Darwin and Canberra all posted slim growth.

A second wave of infections and the ‘fiscal cliff’ still remain key risks to the market

The results are despite a resurgence in market activity, with live auctions and inspections back on the agenda and new listings returning as Australia’s containment of COVID-19 appears to be working.

Except in Victoria, that is. The state moved this week to reinstate level three restrictions on ten Melbourne postcodes after discovering “unacceptably high” rates of coronavirus transmission.

The possibility that the city and state could be again locked down may hamper the economic recovery effort more broadly.

“Even though Melbourne is going to be most affected, if it shuts down it is going to affect the whole country as well,” Domain economist Trent Wiltshire told Business Insider Australia.

But as government and bank support measures approach their September expiry date, there are still larger concerns the market could be headed for a so-called fiscal cliff.

“The key thing that potentially will push prices down is if people are forced to sell their properties,” Wiltshire said.

“If we have people losing JobKeeper or the higher JobSeeker payment and then to need to start repaying their mortgage again, then that’s a really big hit to them, the economy and that will likely see a big rise in forced sales.”

However, he remains of the opinion that such a situation is unlikely, saying the federal government would be “crazy” to remove the economic safety net in its entirety. Nor is it in the interest of the banks to foreclose.

“If they can avoid it the banks don’t want to make people sell,” Wiltshire said. “The good news is we’ve seen around 20% of people who have deferred on their home loan begin making repayments again.”

While initial forecasts may have been overblown, the risks that make them possible haven’t yet disappeared

However, while Commonwealth Bank economists say it looks likely actual price falls will undershoot their 10% forecast, they expect there is more to come.

“For the record, we have not revised our forecast for a 10% fall in dwelling prices nationally. There are a number of dynamics that are still playing out and it’s still early days in terms of the big shock to the economy,” head of Australian economics Gareth Aird said.

“In addition, the house price expectations index from the Westpac [consumer sentiment survey] remains in pessimistic territory.”

Given the relationship between price movements and sentiment, that doesn’t bode too well either.

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