Pandemic, recession, closed borders: can anything stop the Australian housing juggernaut?
The property market has confounded predictions it would collapse during the coronavirus crisis.
The world is gripped by the most serious pandemic for a century, the US presidency is facing transition, but at least one thing remains certain amid all the chaos: the Australian property market keeps going up.
Figures for October showed this week that prices have risen for the first time since the onset of the coronavirus pandemic in the latest batch of data to confound expectations that the property market would collapse under the weight of lockdowns, recession, unemployment and lack of immigration-driven population growth.
And with the Reserve Bank cutting interest rates to a record low of 0.1% on Tuesday, owner-occupier lending hitting an all-time monthly high of $16bn according to ABS data, and savings soaring 20% to give households a property war chest, what is going to stop the Australian housing juggernaut?
Nothing is the short answer, according to some expert observers, who argue that because money is cheaper to borrow it is often more affordable to buy a home than it is to rent one.
Cameron Murray, an economist and fellow in the Henry Halloran Trust at the University of Sydney, said there had been a fear factor in public discussion about the property market. Talking about a collapse might make a more dramatic story, he said, but it was wrong to ignore factors such as the lack of correlation between unemployment and house prices, the small number of houses traded every year relative to demand, and the impact of continued rate cuts.
“I’ve been predicting for months that the housing market would be more likely to rise than fall,” Murray said.
“People say houses are expensive, but it’s never been cheaper because they’re being given money to buy a house for free, effectively. Add up the repayments and you can see.”
Into the bargain, he argues, the 90% of the working population who were still in a job haven’t, in many cases, had to pay their home loans because of mortgage holidays, and might also have been permitted to dip into their superannuation accounts to take out $20,000. In addition, they have not been able to spend any money and so their bank balances are healthier. “They’ve got more leverage. Savings are through the roof.”
If you are fortunate enough to still be in work and have banked some cash during lockdown, the maths do check out. Say you are buying a home for $800,000 and you can borrow the money at 2.5%. It is a massive sum for many people, but the repayments would be around $20,000 a year, which is probably less than the cost of renting in many city suburbs.
But the crucial factor identified by most economists and market observers is the huge government stimulus pumped into the economy, estimated to come at a cost of almost $100bn to the public purse, along with action by the Reserve Bank that has now seen rates fall to historic lows.
Louis Christopher, founder of of SQM Research, said there was “nothing fundamental” behind the upward shift seen in capital cities such as Brisbane, Perth and Adelaide, especially in October. It was to do with public money such as the jobkeeper payment scheme, the home builder grants and extra help for first-time buyers.
“Nothing fundamentally is driving prices higher,” he said. “If anything they should be going lower given we’re in the worst recession for decade. It’s nothing but government stimulus.”
Investors, he noted, were seeing an especially helpful policy playing field because, in Sydney for example, they could borrow at 2.5% and see a rental yield of 3.5%. Yields are more like 4%-5% in Brisbane.
“That’s unheard of in Sydney because that is cashflow-positive [in profit] straight away for investors,” he said. “That’s the first time in my career it’s happened. Normally it takes five to seven years to turn positive.”
Some spike in demand was also accounted for by people seeking upgrades to their homes because they wanted more space to make working from home easier during the age of lockdowns. Unit prices have not risen in most capital cities, Christopher said. The latest SQM national monthly rolling average of asking prices was a decrease of 0.3%, compared with a rise of 2% for house prices.
Alex Joiner, economist at the fund manager IFM in Melbourne, agreed that the government and RBA action had managed to “short-circuit” a lot of the usual negative impact of a recession on unemployment and loss of income.
In his view, the maths was also working better for first-home buyers.
“The Reserve Bank has pushed down rates and it’s as cheap as money gets, and that makes housing more affordable,” he said.
“The government can’t boost people’s income but it can drive through lower rates. It’s an owner-occupier led recovery and first-home buyers as well. They are seeing very low rates and they have the confidence that rates won’t increase. Phillip Lowe said they wouldn’t go up for three years at least, so that means first-time buyers can commit to buying knowing the repayments won’t go up.
“We’re starting to see a turnaround mainly in Brisbane, Perth and Adelaide but also Sydney is starting to turn higher. Then we’ll have the summer break and when we come out of the economy is going to be in the position where policy makers want it to be and February March should start to see strong demand.”
But he cautioned that was probably the last time that the housing market could be pumped up by rate cuts because there was nowhere left for the RBA to go with the cash rate now at 0.1%. The next cycle for interest rates will have to be upwards but in the meantime the juggernaut keeps rolling.