“Unless you’ve been living under a rock, the topic that has been stealing all the headlines of late, not to mention leaving many people in disbelief, is the fact that the Australian Property Market is growing at its most rampant rate in 17 years (against all odds, or so it may seem).
The purpose of this article is to help you better understand WHY, and whether this rate of growth is sustainable!”
Let’s first look at the 2015-2017 Property Boom…
The first signs of the boom taking place started to become noticeable around late September 2013. However, it was around late 2015 – early 2017 in which the market was at its peak.
That boom period made perfect sense – record low interest rates (1.5%); population growth; influx of foreign investors, and of course, low stock levels.
Another point worth noting, this boom cycle did not take place across the whole of Australia (unlike what we are experiencing now), all the action was happening on the east coast border – Sydney, Melbourne and Brisbane.
What happened between 2017 – 2019?
The changing of the guard really came into play as part of the May 2017 Federal budget announcement. The catalyst for these changes was due to an uproar from the Australian citizens, fearing that their young generations would no longer be able to afford a home in preferred metro regions.
Needless to say, a massive gap between average Australian household income vs home affordability had emerged as a result of that boom cycle – sadly wage growth got left behind. The Government addressed instruments such as ‘first home buyer scheme incentives’ and ‘stamp duty exemption packages’ as a result, which did prove helpful for first home-buyers.
In my opinion however, there were two key instruments which played the biggest role in the cooling of the Sydney, Melbourne and Brisbane property markets:
- APRA cracking down on the banks, enforcing stricter lending criteria and ‘open book policy’ for APRA to oversee.
- Foreign Capital Gains Tax Threshold, which had been lifted from $2,000,000 with 10% payable to the ATO (Australian Taxation Office), to $750,000 and 12.5% payable to the ATO.
At the time of these changes, there was ongoing debate between leading economists across the country, not to mention wide-spread media coverage, as majority were of the belief that these policies would not have much of a bearing on the property market, as interest rates were still at record lows, coupled with the fact that foreign investors were not making up a big portion of the boom – it was in fact local investors (so they claimed).
Looking at the above statement from a logical standpoint, if ‘foreign investors’ did not play a significant role in the boom at the time, why was the ‘Foreign Capital Gains Tax Threshold’ quota increased? Yep, you guessed it. The rate of foreign investors buying up property was a lot larger than what statistics had indicated, hence this policy had to come into play to prevent foreign investors from cashing out.
Further still, the apartments that were once being sold ‘off the plan’ within a matter of hours all came to a crashing halt post May 2017, and it still remains true until this very day (11th March 2021) – it all hinged on foreign investors.
Throughout the course of 2018 – mid 2019, the Sydney property market had corrected approx 6-7% (keeping in mind it had grown approximately 40% between 2014 – 2018 period – it was very much in surplus). Interest rates were still at record lows, however hardly enough to combat APRA’s intervention of bank lending and the new restrictions that were imposed upon ‘Foreign Investors’. (Government intervention as a result of the May 2017 Federal Budget appeared to be paying dividends).
Additionally, the lead up to the Federal Election in May 2019 had also seen the brakes put on the property market. After the election however, the 6-7% correction that was seen across the board between 2018 – mid 2019, was essentially nullified between the June 2019 – December 2019 period.
Consumer confidence had again emerged, as there were not going to be any changes to ‘negative gearing’, and stock levels continued to remain low.
What happened to the Property Market in 2020?
I think most of us remember the day in which Prime Minister Scott Morrison took to the podium in March 2020 and announced lock down protocols. As a nation, it was unchartered territory, we were all taken by surprise, a lot of us in a state of shock, fearing our loss of jobs, fearing income loss – Australia was put on hold for 2 weeks!
Without boring you all with the nitty gritty, I’ll simply summarise the outcome of the recession between April 2020 – December 2020. It was a recession like no other, with government stimulus packages designed to keep the economy buoyant, a property market which had bucked the trend of a drastic correction (averaging 4% growth across the Nation).
A property market correction was avoided as the Government did an excellent job of making sure an influx of properties did not bombard the market as a result of financial hardship. (Again, stock levels remained low!)
Arguably, given the rate of growth shown toward the back end of 2019 due to ‘consumer confidence’ and ‘low stock levels’, there was no reason to suggest that the Sydney Property Market would not have recorded double digit price growth for 2020 had it not been for Covid-19, especially as interest rates were still at record low levels at that point in time.
What has triggered the 2021 Property Boom?
Firstly, what we must understand are the series of factors at play here:
- Apartment market is still recording negative price growth despite the current boom, this is due to consumer preference towards houses (no foreign investors to bridge this gap between supply/demand).
- Strong demand for housing outside our largest cities.
- Majority of properties being purchased are by owner occupiers (in vast contrast to the 2015 – 2017 which was led by investors).
- Large government incentives for first-home buyers and home builders.
- Record low interest rates (0.10%)
- FYI – It is also worth noting, that we are currently witnessing the slowest population growth in over a century, yet the market is booming.
If it’s one thing that history tells us, property markets appear to boom/correct as a result of two key drivers:
- Consumer Confidence.
- Supply & Demand.
Things such as low interest rates, use of fiscal policies, government incentives/grants, immigration, APRA and so forth – these are examples of instruments, they are not the drivers of change.
So, when we look at what the Government has done to keep our economy afloat using the following instruments at their disposal – low interest rates and government stimulus packages, it should come as no surprise that the property market was inevitably going to take off once consumer confidence had re-emerged (low stock levels were always in play).
Consumer confidence appeared to re-emerge as soon as the vaccine was announced to hit our shores. January 2021 – February 2021 was the transition period. The 20-25% increase in property values seen overnight (in the suburb of Cherrybrook NSW 2126 as a notable example) is a direct result of making up for lost time throughout the 2020 period.
ANGELO’S VERDICT – Is this rate of growth sustainable?
If you were to ask for my opinion, it’s a straight NO!
I say this with reference to the Federal Governments May 2017 Federal Budget Announcement. They had to step in to put a hold on drastic property price growth as the average income remained subdued. Fast forward four years on, it’s deja vu – average incomes have not grown, the only thing that appears to have given the average income a bolster is the Covid-19 Government Stimulus packages, in turn, consumers saving by not being able to go out and spend due to lockdown measures. Low interest rates are just fuelling the fire.
I don’t expect the RBA to increase interest rates anytime soon. There are a series of other instruments the Government has at their disposal. As one example, increasing interest rates is not going to do anything to help the ‘apartment sector’ which is lagging significantly. It will only make things worse! History also shows us that record low interest rates are often not solely responsible for property booms as I’ve illustrated.
I anticipate the market to cool as a result of Government Policy, replicating what we saw as part of the 2018 – 2019 correction; measures in place to take the heat out of the market, not suppress it completely. If things keep going the way they are, I’d expect changes to come into play sooner rather than later.
The Government will also likely want to get things under control before immigration inevitably takes place at some point in the next 2-3 years or so. Once population growth ramps up again, expect another surge in property values – another instrument at our Governments disposal.
MORAL OF THE STORY:
The instruments used by our Government for Policy Decision Implementation will result in ‘Supply/Demand Levels’ and ‘Consumer Confidence’ (the drivers). Apply this logic to past boom/bust cycles and the results will enlighten you – you’ll truly be amazed.
Angelo Lambropoulos (Director)
Lambros Realty Pty Ltd
Don’t values drop when there’s a recession? What’s going on – and can the rise continue?
I had a friend send the following article to me. It’s a great read for anyone unsure as to why property values have risen (generally speaking of course) despite the impacts of Covid.
“I stumbled across the following article this morning. As you’ll soon see, statistical data and expert analysis clearly illustrates what I’ve been saying all along in relation to the Australian Property Market – IT’S NOT GOING TO CRASH despite all the widespread doom and gloom that was incorrectly portrayed by mainstream media due to Covid.
I’ve said it before and I’ll say it again – ‘Low-cost debt’ and ‘Mortgage repayment deferrals’, in turn leading to ‘Low-stock levels’, has been instrumental in cushioning the blow – Angelo Lambropoulos”
Eliza Owen, head of research at CoreLogic, has released an interesting report explaining why Australian property values have held up so well in the face of the COVID-19 pandemic:
2020 has been a devastating year for many households and small businesses. As Australia moves through its first recession in over 28 years, ABS payroll data suggests wages are down 4.3% between Australia’s 100th case of COVID-19 on March 14, and October 31st. In the same period, payroll jobs decreased 3.0% At the onset of the pandemic, consensus seemed to be building that the national decline in property values could reach 10%, with worst-case scenarios suggesting prices could fall by as much as a third.
But between March and October, Australian home values have fallen just 1.7%. In fact, October marked a 0.4% increase in values, with the trend over November suggesting a further acceleration in growth.
Although housing values are once again rising, it’s important to highlight that Melbourne housing values remain around 5.4% below their recent high, and Sydney housing values are still 4.8% below their 2017 peak. Values in Perth and Darwin are more than 20% below their 2014 peaks, while the remaining capital cities have seen housing values move to new record highs through the COVID period.
As Australia enters the start of a gradual recovery from the largest economic downturn since the 1930’s, how can this be reconciled with such a mild downturn in property values? A few factors that may explain the relative stability in housing, at a high level, are put forward below.
The cost of borrowing money is probably one of the most important factors influencing property values. Over 2020, the RBA have reduced the official cash rate target (which influences lending rates) by 65 basis points, to 0.1%.
In a bid to stimulate economic activity, the reduced cash rate has lowered bank funding costs, leading to record low mortgage rates. This relationship has held up historically, with RBA research previously suggesting that a 100 basis point reduction in the cash rate can lead to an 8% increase in property values over the following two years.
In fact, it is not uncommon for housing markets to increase in value during negative economic shocks, or periods of rising unemployment. This is because the monetary response to rising unemployment and falling consumption, is often to lower the price of debt. Those that still have a secure income during these shocks may be more inclined to borrow and buy as a result.
Mortgage repayment deferrals
The Australian household debt to income ratio is an eye-watering 185%. This high level of debt is a vulnerability amid severe economic contractions, because sudden job loss reduces the ability of households to service this debt. In the April Financial Stability Review, the RBA highlighted that each 100 basis point increase in the unemployment rate could lead to an 80 basis point increase in the portion of mortgages in arrears.
In the case of large-scale mortgage debt, ongoing arrears can lead to forced sales, which in turn fuel risks associated with higher supply in the housing market, lowers values, and higher rates of negative equity, where the borrower sells their property for less than what they owe the bank.
Mortgage repayment deferrals have acted as a temporary stopper on this vicious cycle. Those that did not want to sell amid economic uncertainty due to an inability to repay their mortgage, did not have to. This may have contributed to very low levels of stock throughout 2020, which only reduced further amid stage 2 restrictions from March. The low level of stock on market likely helped to insulate dwelling values during this time.
The April Financial Stability Review also noted that over half of owner-occupiers with a mortgage had at least 3 months of prepayments on their mortgage. Indebted households are further supported by the record-low cash rate, which is lowering the cost of servicing debt as incomes have fallen.
APRA data on loan deferrals show borrowers are becoming less dependent on these policies. As jobs and incomes slowly recover across the economy, the portion of housing loans deferred has come down from a peak of 11% in May, to 7% in September. More recent updates from lenders indicate the number of mortgages on deferral arrangements fell sharply through October and November.
Continued leniency for mortgage repayment deferral, particularly for owner-occupiers, is in the interest of the banking sector, and extends the ‘bridge to recovery’ as the economy gradually recovers.
It is worth noting indebted households do ultimately pay for mortgage repayment ‘holidays’. With unpaid interest capitalising on their loans, these households will be further indebted down the line, which may constrain their future consumption, particularly in the event of another shock to the economy. For now, however, it is a policy which has helped to stave off further deterioration in housing markets.
This economic downturn was different
A third, important factor that may have insulated parts of the housing market is the specific nature of the economic downturn. Severe job loss across hospitality, tourism and the arts resulted from the purposeful slowdown of ‘social consumption’.
The chart above shows that those working in food and accommodation and arts and recreation, have seen devastating job loss through the pandemic. However, those working in this industry are less likely to have mortgage debt.
The decline of employment in these sectors likely contributed to severe pockets of rental income decline, but the investor servicing debt may be able to hold on to the asset while it is temporarily vacant.
It is worth noting that prolonged declines in rental markets do ultimately pose risk to values. An example is Inner-city Melbourne, which has high exposure to rental demand from overseas migrants. Median asking rent values across the Melbourne SA2 market have fallen 24.2% between March and October. This highlights re-opening international travel and migration as a key part of bolstering rental income from property.
Housing markets did not hold up everywhere
These aforementioned factors may have contributed to stability in the housing market at an aggregate level in the face of COVID19.
The many markets that make up ‘the Australian property market’ still add complexity in evaluating its performance. There have in fact been significant corrections in property values since March, such as in the Inner East of Melbourne, which fell -9.6% in value over the period. COVID-19 has affected property markets, but severe loss in housing values has so far been contained.
Looking forward, despite further reductions in fiscal support, dwelling values are likely to continue rising off the back of the November cash rate reduction, converging with a recovery in consumer sentiment and economic conditions. A strong institutional response and the manufactured nature of the current downturn has moderated the impact of COVID-19 on the housing market, and would be further buoyed by the ongoing containment of the virus.