Why are Australian house prices not declining but instead rising?
Despite warnings of the largest recession since the 1930s, house prices in Australia have seen minimal decline this year and have been on the rise, driven by record-low interest rates and unprecedented stimulus measures.
Despite the economic crisis that Australia has experienced, the country’s housing market has defied expectations, with many homebuyers surprised to find that an economic downturn does not necessarily mean a drop in house prices.
Why does it seem that house prices can defy the usual patterns? The following seven reasons provide some explanations:
- Declining interest rates
Interest rates have been reduced to record lows this year as the Reserve Bank attempts to support economic recovery.
While banks have not completely passed on the rate cuts to borrowers, homeowners can secure fixed-rate deals as low as 1.99% per annum.
Felicity Emmett, Senior Economist at ANZ, stated, “The extent of the interest rate cuts has been beyond people’s imagination. People have moved from floating-rate interest to fixed-rate interest, so the drop in their rates has been quite substantial. It means people can borrow more money.”
Buyers are then turning to auctions with larger budgets, driving up housing prices.
- Surge in housing loans
The amount borrowed for home purchases or refinancing has been on the rise, reaching a historic high in October.
While loan approvals remain challenging to obtain, banks are willing to provide loans, especially to low-risk borrowers who can demonstrate stable income and control over their expenses.
The Reserve Bank has also provided assistance by offering commercial banks up to $200 billion in cheap funding to help them provide loans to small businesses and lower mortgage rates.
- Improved job market
Although the economy experienced a period of hibernation due to measures taken by state and federal governments to slow the spread of COVID-19, workers have begun to reenter the workforce as the economy reopens.
“We do think the hit to the labor market is going to be much bigger and the recovery is going to be much faster than we anticipated,” said Ms. Emmett.
Furthermore, she noted that most job losses occurred in industries such as hospitality, where workers are less likely to own or purchase homes.
“The hit to the labor market has been very uneven, and it hasn’t hit homeowners or aspiring homeowners as hard as it has hit renters.”
- Increased disposable income
While wage growth has been slow, some employed individuals have seen an increase in disposable income.
Tax relief measures in the recent federal budget are boosting take-home pay, and the Commonwealth Bank of Australia estimates that average wages for full-time workers will increase by 1.6% in the 2021 fiscal year without being affected by tax reductions.
Some households have also saved significant amounts of money by not being able to travel or dine out, and a portion of these savings may flow into real estate, driving up prices.
- First-home buyer advantages
Since the first-home buyer grant tripled during the global financial crisis, first-time buyers have flooded the market this year with subsidies and discounts, creating the largest buying spree.
Victoria recently announced further tax concessions, and New South Wales plans to switch from stamp duty to land tax, while some states offer stamp duty discounts for affordable housing.
Buyers have been taking advantage of the federal government’s “First Home Loan Deposit Scheme,” allowing them to purchase with deposits as low as 5% while avoiding mortgage insurance.
- Loan deferrals providing support
Stimulus measures introduced during the height of the crisis have continued to have an impact.
Borrowers who lost their jobs in the fall were able to defer mortgage repayments, avoiding a wave of forced sales that could have lowered property prices.
JobKeeper and JobSeeker payments have also helped sustain households.
Michelle May, a buyer’s agent in Sydney, recalled being approached by “opportunistic” buyers earlier this year looking for bargains.
“They were telling me, ‘I’ll only buy something if I get this return or this discount,'” said May, the head of a buyer’s agency.
She noted that there are fewer opportunities for negotiation compared to the price declines witnessed in the market during 2017-18.
She said, “Vendors who don’t have to sell are holding off, and COVID has done the same thing, and that’s a big reason for pushing prices up.”
She added that buyers now realize that the possibility of discounts is slim as they queue up for open houses or attend auctions, such as a recent Inner West auction with 22 registered bidders, leading to concerns about missing out on opportunities.
“I’m seeing a lot of frustration and a bit of panic.”
- Rising house prices
November data from CoreLogic shows that house prices have been rising in every capital city, even in Melbourne after a prolonged lockdown, except for Melbourne, which remained steady.
Following the September Domain House Price Report, which found Melbourne to be stagnant, house prices have been rising in every state capital.
Economists have revised their forecasts, no longer expecting price declines of 10% to 15%, but rather anticipating further price increases.
Ms. Emmett mentioned that the winding down of fiscal stimulus measures in the coming months could bring pressure to the market, along with slow population growth and rising unemployment.
She stated, “There are a lot of negatives facing the property market.”
“But on the positive side, there does seem to be a lot of momentum. We’ve seen very high clearance rates at auctions, and there are certainly anecdotes of properties selling well above the reserve price.”
“This is creating a very positive sentiment, and people who are worried about missing out on opportunities may reenter the market.”
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