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How the Australian property market withstood the COVID-19 downturn


Lower mortgage rates, government policy and price falls have created "a perfect storm" – for buyers who've managed to keep their jobs.

Cast your mind back to March of this year. The reality of the COVID-19 pandemic had truly set. Restrictions were introduced across the nation. Auctions and open homes were cancelled. Economists and property experts were predicting, in the worst case scenarios, falls in property prices of 20% or even 30%.

These worst case scenarios have not come to pass. The Australian property market has actually proved more resilient than most people thought. Property prices in Brisbane, Adelaide, Hobart and the ACT are at record highs. In Sydney and Melbourne, prices have fallen but are recovering quickly.

Nationally, home values rose 0.4% in October and 0.8% in November according to CoreLogic's Home Value Index.

Compared to other property downturns in recent Australian history, this one is looking quite short and the recovery is already underway. Much of the price drops this year have been erased by recent growth.

This CoreLogic graph is a helpful illustration.

CoreLogic graph showing how the COVID downturn in property prices compares to previous downturns.
Source: CoreLogic Quarterly Economic Review: the Australian Residential Property Market and Economy

What is driving this price growth?

Australia has handled COVID-19 better than most countries, and that obviously has a positive impact on property. But even in Melbourne, which has had a much longer and stricter lockdown than other Australian cities, we are seeing a rise in prices.

"Housing values have been supported by a strong mix of regulatory, monetary and fiscal measures," said CoreLogic Head of Research Australia Eliza Owen in CoreLogic's Best of the Best Report 2020.

These measures have "induced record-low mortgage rates, the deferment of mortgage repayment for households impacted by COVID-19, support for low income households, as well as grants and concessions for owner-occupier purchases."

Record low home loan interest rates

Interest rates were low before the pandemic hit. But as COVID-19 began to weigh on the economy the Reserve Bank of Australia cut the official cash rate twice in March. This drove lenders to cut home loan rates.

The RBA cut the cash rate again in November, driving the cash rate down to just 0.10%. It has never been this low, and the effect is to make lending and borrowing cheaper for financial institutions, who tend to pass these savings onto borrowers.

In December 2019, the lowest variable owner-occupier home loan in Finder's database was 2.69%.

In December 2020 the lowest similar rate is 1.99%. That's a difference of 70 basis points.

With a $400,000 home loan over 30 years, that interest rate difference is stark. At 2.69% your monthly repayments would be $1,620. At 1.99% that falls to $1,476.

That's a saving of $144 a month or $1,728 a year.

With interest rates so low it becomes cheaper and easier to borrow money. This is one of the strongest drivers of price growth in the property market. Changes to interest rates and lending policy have a huge effect on property prices whether there's an economic downturn or not.

Government policies are helping home buyers

There are quite a few policies encouraging buyers, particularly first home buyers, to purchase properties. This has helped drive demand.

The First Home Loan Deposit Scheme, which was expanded this year, lets first home buyers enter the market with low deposits while avoiding hefty lenders mortgage insurance premiums. The HomeBuilder grant provides cash grants to eligible buyers, builders and renovators (although eligibility criteria for grants are relatively narrow).

State governments have made moves too. Victoria has temporarily slashed stamp duty for properties under $1 million in value, and Melbourne real estate agents are reporting that first home buyers are rushing to take advantage of it.

Pandemic-related support policies have also helped struggling borrowers, averting widespread foreclosures. Most lenders expanded their hardship or compassionate support policies during the pandemic, allowing struggling borrowers to defer mortgage repayments.

JobKeeper and JobSeeker payments also helped some businesses and individuals keep their heads above water. JobKeeper payments are ending in March 2021 and this may cause a drag on property prices in the near future.

Prices briefly fell during the pandemic

As prices began to fall in some cities, notably Sydney and Melbourne, first home buyers rushed in to buy while there was a perfect window of lower prices, low rates and government policies.

This demand has helped limit price falls and drive the recovery. Even now, prices in Australia's two biggest cities remain below their peak. It is still a good time to buy. That may not last for long if the recovery continues at its current pace.

Will house prices continue to grow in 2021?

Australia's economic recovery is far from complete. The unemployment rate remains very high. But the economic effects of the pandemic and recession have not been distributed equally. Some industries have been hit harder than others. Young people and casual workers have been hit the hardest economically.

The uneven economic recovery has helped the property market but will only serve to push affordable housing further out of reach for the least well off.

If unemployment remains high and younger Australians, the future first home buyers, remain locked out of the market then property prices won't necessarily continue growing.

But many fundamental factors suggest 2021 will see continued growth in property prices.

"There is a perfect storm of positive factors developing for our property markets next year – a confluence of multiple growth drivers which will propel our property markets into 2021 and 2022," investment expert Michael Yardney told Finder.

The RBA itself agrees. "The Board is not expecting to increase the cash rate for at least 3 years," RBA governor Philip Lowe said at the bank's December meeting. If rates stay this low then it will really help keep property prices afloat.

And in March 2021, proposed reforms to lending laws will make it even easier for borrowers to satisfy lending requirements.

Australians broadly seem confident in the property market's future too. According to Finder's Consumer Sentiment Tracker, 67% of respondents say now is a good time to buy property, the highest ever response. 63% think that property values will increase in the next 12 months, and that number too is at its highest in a year.

Looking to enter the market yourself? Get your finance sorted with a competitive home loan rate or speak to a mortgage broker for some expert help.

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