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To understand what is happening to Australian house prices, it is important not to view Australia in isolation, but to also understand the global trends currently affecting world real estate.
To understand what is happening to Australian house prices, it is important not to view Australia in isolation, but to also understand the global trends currently affecting world real estate.
The pandemic has affected every person in the world and has affected every business and industry, and real estate is no exception.
Property is probably the biggest business in the world. By one estimate, construction, the buying, selling, and renting of properties, and the imputed benefits to owner-occupier’s account for around 15 per cent of rich countries’ GDP.
Property also makes up around two-thirds of the tangible capital stock in most economies.
Most important of all, property is by far the world’s biggest single asset class. Investors have much more money tied up in property than in shares or bonds.
What is happening in Australia is also happening in Canada, the United Kingdom, the United States, and many other western and developed countries.
Pandemic fuels broadest global house price boom in two decades
In 2020, analysts and economists were expecting terrible things for global real estate markets.
As we all know, the coronavirus pandemic had sent large parts of the world into lockdown, shutting businesses, costing millions of jobs, and putting the housing market into a deep freeze.
The number of people asking lenders for more time on their mortgage payments surged as the global recession hit.
The fear was that house prices would collapse.
An increase in bankruptcies and unemployment would squeeze disposable incomes and make it difficult for highly indebted homeowners to keep up with their mortgages.
“Actually, none of that happened,” said Kate Everett-Allen, the head of international residential research at consultancy Knight Frank.
In fact, it proved to be the opposite.
The COVID effect
In an unexpected twist, the pandemic has benefited house prices.
“There are many reasons, but a contributory factor to rising house prices globally has been the mass reassessment of housing needs in the wake of the pandemic, whether that’s been buyers seeking home offices, gardens or just to be closer to wide-open spaces,” added Ms Everett-Alle.
With so many people having to work from home, they realised their home is their sanctuary, and they needed more or bigger space, home offices, and better design.
Governments around the world helped homeowners by temporarily banning repossessions and providing trillions of dollars of support for workers and businesses.
Interest rate cuts kept mortgage repayments affordable in many places, while temporary reductions to purchase taxes in some markets spurred home buying.
A freeze on repayments greatly helped many
Apartment complexes like Build to Rent projects around the world have seen huge increases in occupancy, with younger tenants especially appreciating the social interaction such complexes bring, compared to standard apartment buildings.
Across advanced economies, interest rates began to fall sharply during the global financial crisis and have remained at low levels through the 2010s.
These measures cushioned the housing market from the coronavirus recession, but the pandemic itself has actually turbocharged prices.
“If you lock up the vast majority of the population for months, they [rapidly reassess] what they want from their homes,” said Richard Donnell, research director at UK property platform Zoopla.
As people were forced to transform houses into offices and classrooms, it didn’t take long for a “race for space” to take hold.
Globally, many house markets appear to be on a non-stop upward march.
Annual house price growth across the OECD group of rich nations hit 9.4 percent — its fastest pace for 30 years — in the first quarter of 2021, as economies rebounded from severe coronavirus-triggered recessions.
Soaring real estate prices can have serious economic consequences, but the market incentives that drove them there aren’t likely to go away overnight – even when the pandemic panic subsides.
Why are Australian house prices rising?
Like many other countries, extremely accommodating financial conditions with record-low interest rates has helped boost house prices at an unusually fast pace during a period of weak economic activity.
Low borrowing costs make house purchases more affordable relative to rent and to other investments.
With mortgage rates at all-time record lows, more people decided to move house, upgrade to a bigger property, or move to quieter places, following long hours spent at home during the lockdown.
Low interest rates, government grants, Covid working-from-home arrangements, and solid job security have translated to strong demand for homes.
The Reserve Bank has also indicated that rates are unlikely to rise until 2024, further underpinning the desire to borrow to buy property.
At the same time that demand for homes has been super-strong, Covid-19 has been a key factor restricting the supply of homes on the market.
The situation has been amplified by lack of new supply and increasing building prices.
Even the much-maligned high-rise apartment market in Australia has seen plummeting new permits and building approvals.
This sector, much against common belief, is the smallest segment of Australian housing.
Many Australians have moved out of the cities and suburbs to coastal and country towns, causing prices to escalate and rental property to have full occupancy.
Some wealthy individuals in Australia have fled the capital cities for larger country homes with more outdoor space in the anticipation that they won’t need to commute into their city offices as much even after the pandemic ends.
In addition, many households, particularly those that were already better off, are financially in a better position than they were before the pandemic hit, since they’ve spent less on travel (both overseas and interstate), entertaining, vacations and eating out, and have accumulated large savings since the start of the pandemic.
A lot of this additional income has been allocated to the housing market.
People rushed into property markets that were already busy with pent-up demand from households that had postponed moves.
And as prices started rising, even more money flowed in.
Potential vendors have been reluctant to list properties until there is greater certainty on lockdowns, health orders, and general mobility restrictions.
The end result is that home prices have been soaring – recording the fastest annual growth rate in 32 years.
One buyer our company knows used to take his family to Europe each summer.
With the borders closed, he kept his luxury Sydney mansion, and purchased a multimillion-dollar country spread, and had the family stay over the summer instead.
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