This is not a COVID property boom: Where prices will go in 2022
Housing supply and demand: Given that everyone needs housing, this topic is relevant to literally everyone, yet it's possibly the least understood topic on the planet.
Contrary to the widespread belief of economists and a bunch of other so-called property "experts", "housing demand" has many more important components than population growth, and "housing supply" has more to it than new dwelling construction.
Last year, Australia's population growth rate was the lowest in over 100 years. But property prices in most of the country increased by 10% or more. Many are currently running at 20% annual property price growth.
What does supply and demand really mean in regards to property?
I want to break it down so you can understand how and why this is happening in our property markets, and what I expect to see happen going forward.
To be clear, housing demand exists whenever one attempts to transact in real estate, either as a tenant (rental demand) or a property buyer (asset values).
Every year, there are significantly more real estate transactions from a location's existing population than from those adding to a population.
For kicks and giggles, we recently conducted a straw-poll of sorts among the Propertyology team to see how many different addresses we had each lived in throughout our lives. Across 51 years, I personally have lived in 13 different dwellings, even though I was not contributing to population growth statistics. Demand for housing was triggered each time I moved!
Why did property prices grow so much in 2021?
The volume of properties listed for sale and for rent in large parts of Australia has been consistently falling for 6 years. This low supply means that active buyers and renters of real estate are fiercely competing to secure the dwelling of their choice.
The shortage of resale and rental supply was such that property markets right across Australia began to produce significant growth, approximately 6 months before the arrival COVID-19.
The germ merely placed things on hold for a few months during the national lockdown in Q2 2020.
The health pandemic certainly has created some unfortunate casualties, but the human response to it added to the upward pressure that was already there.
Where will property prices go from here?
While it's impossible to predict future monetary and credit policies, Propertyology anticipates that this current property market cycle may see median house prices produce growth of between 50% and 80% over the 4 years between 2020 to 2023. We've already experienced around 20% of this growth.
Our previous research identified a number of capital cities that were poised for growth. Looking ahead, in our view, the biggest capital gains will be among Australia's 200 individual regional towns and cities.
What will drive this property price growth?
- 5 years of very low participation by property investors means that Australia has consistently fallen short of adding enough extra rental supply.
- Research conducted by Propertyology has identified 34 individual cities and towns where the annual asking rent for a standard house has recently increased by $1,500 or more.
- The volume of properties listed (for resale supply) is also at an all-time record low, because for several years, property owners have lacked the confidence to list their dwelling for sale.
- The lack of confidence to transact in real estate came from the last 2 federal election campaigns centred on negative gearing changes, while APRA (the banking regulator) also made it very difficult for people to obtain finance.
- Australia's economic response to COVID-19 included measures to stimulate the construction sector, so a spike in new dwelling supply is anticipated in 2021/22.
- In late 2019, APRA improved the ability of responsible borrowers to borrow money. The RBA made credit more affordable, and the federal government introduced a clever support package for first home buyers.
- Collectively, these policies released years of pent-up buyer demand, meaning there were more buyers in the market.
- COVID-19 lockdown risks have adversely affected jobs in congested CBD retail and hospitality businesses and in the airline industry. But there are more job opportunities for tradespeople and those in healthcare, manufacturing, agriculture, domestic tourism, renewable energy and the defence force.
- Income security and consumer confidence always play a critical role in the psyche of buying and selling real estate.
- Existing owner-occupiers have been the most active buyer demographic. There is more money in the household budget from interest rate cuts and not being able to holiday overseas. So, there is an accelerated rate of people upgrading their home.
- Others are "swapping" dwellings to accommodate working from home. And some are completely moving town, including a net 26,000 and 32,000 former residents of Melbourne and Sydney (respectively) during the 2020 calendar year.
Things to watch from here
- Labour shortages, wage growth and increases to mortgage interest rates (potentially inside the next 12 months) are a real chance.
- The cost to build and/or renovate is likely to significantly increase due to insufficient global supply of materials.
- It will take a few years of strong investor activity to provide the rental supply required, to reduce the intense upward pressure on rents.
- On the economic front, Propertyology is generally optimistic, although we still hold concerns for the outlook of Sydney and Melbourne. We also anticipate the introduction of new taxes by state governments over the next few years.
The bottom line: humans will always require housing and human mobility is a natural part of life. The current upward pressure on real estate is primarily due to insufficient resale and rental supply from an over-engineered housing and financial system.
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.