How long will this property boom last?

Residential property prices are on the rise. One year after COVID-19, home buyers and investors are beginning to wonder if anything stands in the way of Australia’s booming property markets.

The acceleration of property prices right now is nothing to be sneezed at. The average price of an Australian home increased by 2.8% in March, the largest monthly gain in more than 30 years. 

Average real estate prices are now higher than they were before the pandemic. In major capital cities like Sydney and Melbourne, prices are well beyond their pre-pandemic levels. 

Some regional markets have experienced the greatest growth, as COVID-19 sparked a mass exodus from the inner cities and Australians realized they could make a tree or sea-change while continuing to earn big city salaries. 

Low interest rates are by far the biggest driver of demand. But the frothy real estate market is also a reflection of the significant wealth that was accumulated by many Australians over the past 12 months. The economic impact of the pandemic was cruelly uneven. Some lost their businesses while others doubled or tripled their net wealth. 

With several months of record price growth behind us, Australians are now beginning to question how long the good times will last. AMP Capital chief economist Dr Shane Oliver believes there are four factors to consider when trying to forecast how long the current property boom will play out. 

1) Lending standards

It has been a few years now since APRA cracked down on investor and interest-only lending. While not the regulator’s direct intention, these measures did impact housing values. Any lever pulled to stymie lending will have that effect. 

Dr Oliver says the metrics in front of the regulators now show record housing finance, pointing to an acceleration in housing debt, an increasing share of lending at high loan to valuation (LVR) ratios and a rising share of interest-only loans, albeit from a low base.

“All of this suggests that APRA could start tapping the lending standards brake soon, firstly by increasing interest rate buffers but potentially also by reintroducing limits on high LVR lending and restricting loans to customers with lower serviceability,” he says. 

2) The way we live has changed 

Dr Oliver notes that the effects of changing living patterns have played a major role in household budgets. 

“Deferred spending has played a major role in driving housing demand through the pandemic; most salary-earners who kept their jobs were relatively unaffected by the downturn but had fewer opportunities to spend and so some focused more on their home,” Dr Oliver says 

“This effect is likely to lessen as borders begin to re-open and travel resumes to a larger degree, but there are other lifestyle patterns that stand to endure beyond the end of the pandemic.”

3) Government support 

The Morrison government through billions of dollars at the pandemic to keep Australian economy operational. JobKeeper is just one of the many programs introduced. 

Dr Oliver explains that “other, less prominent, programs have also been put in place to support the housing industry over the period, including HomeBuilder (which was phased out with JobKeeper at the end of March), the First Home Loan Deposit Scheme (which is now tapped out) and a number of state-funded equivalents.”

According to Dr Oliver, the winding back of these programs “may still dampen the market a little, but their work is largely done”, and in the absence of a significant new lockdown the impact should be marginal.

“Actual net job losses from the ending of JobKeeper are likely to be low and the proportion of loans at risk is minimal, as demonstrated by the fact that the value of home mortgages still relying on payment holidays had declined from 11% in May 2020 to less than 1% by the end of February.”

4) The economic recovery 

Employment has just about returned to pre-pandemic levels. Nobody could have foreseen how well the Australian economy would recover from the pandemic. This time last year we were all preparing to set in for a long, dark recession. 

But the 2020 December quarter GDP numbers show the Australian economy had recovered to such an extent through the second half of 2021 that output was only 1.1% down on the same point in 2019. 

“This is remarkable, given the sharp falls in the first half of the year, and indicates that we should return to pre-COVID levels sometime in the first half of this year (although return to trend will take longer),” Dr Oliver says. 

“Continued strong economic growth has immediate implications for incomes and house prices, and risks providing a solid platform for continued exuberance in housing.”