Is the only way up? How the real estate market defied a crash amid the COVID recession

Australia's housing bubble was tipped to burst in 2020. But it never happened.

Australia's housing bubble was tipped to burst in 2020. But it never happened. Photo: TND

In the pandemic’s early days, Commonwealth Bank economists warned the real estate market could crash if the virus ran rampant in Australia.

If the country endured a “prolonged” economic downturn, their forecasts said prices could fall as much as 32 per cent.

So, why didn’t they?

First, jurisdictions outside of Victoria and NSW got an early stranglehold on the virus and relaxed restrictions ahead of schedule.

Second, although unemployment soared, further losses were mitigated by JobKeeper – the Reserve Bank estimates the scheme saved 700,000 jobs – and additional federal stimulus.

Third, a bevy of direct support was funnelled into housing. First-home buyers accessed an extended First Home Loan Deposit Scheme. And those building new homes could access $25,000 grants under the HomeBuilder scheme.

Banks also supported those falling in arrears on their mortgages through deferrals that have been extended until March.

And, finally, the RBA slashed interest rates to a record-low 0.1 per cent, enabling people with jobs to borrow more cash and bid up prices at auction.

As a result, the housing market not only avoided doomsday predictions but is now reporting solid price growth across the board.

‘All hands on deck’ countered negative shocks

AMP Capital chief economist Dr Shane Oliver, who predicted a fall of 10 to 15 per cent, said the “all hands on deck” approach outweighed the negative effects of high unemployment, weak rental markets, and collapsing international and investor demand.

Even though some had hoped the pandemic would make housing more affordable, Dr Oliver said a concerted effort was made to avoid a crash as housing has a notable “wealth effect”, which the government will use to support the economic recovery.

This wealth effect implies that consumers spend more money if the value of their assets rise.

Dr Oliver said although it’s “unfortunate” that housing was entangled in desires to support the broader economy, policymakers had to ensure economic activity was not adversely affected.

“If you’re a millennial or Gen Z, you’d be forgiven for thinking there’s a conspiracy from Baby Boomers to get prices up … we saw one incentive after another thrown at the market,” Dr Oliver told The New Daily. 

“Sometimes these crises present opportunities and one was to enable a more sustainable improvement in affordability, but that improvement was somewhat temporary, lasted a few months, then prices picked up again.”

The only way he sees the market slowing is if the Reserve Bank raises interest rates or otherwise reduces support.

With the central bank flagging that rates will remain low for up to three years, prudential regulator APRA may force the banks to tighten their lending standards if prices rise too dramatically, Dr Oliver said.

Those with the means to spend boosted prices

BIS Oxford Economics chief economist Dr Sarah Hunter, however, said the measures thrown at housing improved affordability – for those who retained a job.

Dr Hunter told The New Daily government stimulus and low interest rates encouraged buyers to borrow more from lenders, with average mortgage repayments now lower than rental costs in some suburbs.

As a result, owner-occupiers pushed the value of new home loans to record highs in October, with monthly commitments hitting $22.7 billion.

This meant prices held firm even as demand from migrants fell off a cliff.

“If you’re in a lucky position where your job is secure and your income has been relatively unimpacted, then housing affordability has really improved this year,” Dr Hunter said.

“The mortgage borrowing rates are very low, which has prompted many newcomers to look at jumping into the market and along with – up until recently – falling prices, it’s a pretty attractive market.”

Regional and younger buyers key to keeping prices afloat

Despite immigration predicted to remain well below pre-pandemic levels, Dr Hunter said unprecedented interest from city-slickers in regional markets would continue to lift prices nationally.

“It’s worth keeping in mind [regional] areas outperformed capital cities this year, and the reason why is those markets are much smaller, so it doesn’t take too many people to decide they want to make the jump to really ignite those markets,” she said.

J-Han Ho, a senior lecturer at Curtin University’s School of Economics, Finance and Property, said prices were also likely to continue rising in “aspirational suburbs” where more younger buyers are flocking.

Because many Australians have more cash due to low rates and forced savings – as they could not travel overseas or maintain spending in lockdown – Dr Ho said prices in certain pockets were primed to rise further.

“I do understand in certain cities like Melbourne and Sydney, where they got hurt badly because of international students and COVID lockdowns, it would take them more time to recover,” Dr Ho told The New Daily. 

“But in Perth, we’re seeing more affluent suburbs’ average selling times plummet, and if more transactions are at the higher end of the market and it takes longer for those with impacted incomes to save up for a property, that naturally drags [average] prices up.

“Everybody’s expecting if you don’t get into home ownership now, it might get harder in future because of the availability of finance, so people are heading to market hoping to buy a house in a better location today.”

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