As the economic effects of the COVID pandemic took hold in early 2020, there were widespread predictions of substantial falls in housing prices. At one extreme CBA estimated that, in its worst-case scenario, home prices could fall 32%. Even a more modest scenario pointed to housing prices falling by 11% over three years.
Such predictions are enough to strike fear into the hearts of existing homeowners, particularly those with mortgages. But for those still waiting to experience the great Australian dream, a drop in property values would provide a foot in the door of home ownership. It would also help people seeking to move up the real estate ladder.
Why the expected decline?
The predictions of a hit to housing prices made perfect sense. COVID threw many thousands of people out of work and many others experienced a drop in income. Normally this would lead to an increase in loan defaults and forced sales, creating a lift in housing supply just as the effective suspension of immigration removed a major source of demand from the property market. More supply, less demand, cheaper housing.
But the hopes of many intending first homebuyers and up-sizers – at least those with stable incomes – were soon dashed. After dropping by just 2.1% between April and September 2020, prices rose during each of the last three months of the year. At 31 December 2020 CoreLogic’s home value index was up 3% for the year. Regional areas posted the highest gains (6.9%), but the combined capitals still managed a 2% lift, despite the year’s horrors.
Some of the reasons why house prices held up include:
- Income support. JobKeeper provided an income to many of those who would otherwise have lost their jobs, helping them to maintain mortgage payments and avoiding forced sales.
- Record low interest rates. Those with good cash flow can afford to borrow more, pushing up prices and squeezing out want-to-be homeowners with less income.
- Mortgage holidays. Lenders allowed hundreds of thousands of customers who suffered a loss of income to suspend their regular loan repayments for several months. While deferred amounts, plus interest, need to be repaid eventually, they provide valuable breathing space at times of stress.
- Economic bounce-back. Getting on top of COVID in Australia, saw economic activity recover more quickly than expected. This helped to boost consumer confidence, including the confidence to borrow at low interest rates.
- Government stimulus to support the construction sector.
When will the dream be (more) reachable?
Australian home prices have long been amongst the highest in the world. While much lip service is paid to “more affordable” housing, both politicians and central bankers are reluctant to implement policies that would drive down the cost of housing. Indeed, during 2020 the federal government relaxed responsible lending rules, and the RBA cut interest rates to just 0.1%. The result was a surge in borrowing,
and while first-time homebuyers made up a significant chunk of those new borrowers, the accompanying rise in prices means many intending buyers were again priced out of the market. The outlook at the beginning of 2021 was that Australia’s decades-long real estate bubble was set to continue.
Who can help?
Buying a home is one of the biggest financial decisions you’ll every make. It takes planning and maybe years of effort to achieve, but there are things you can do to let you start bidding sooner rather than later. Talk to your financial planner about strategies you can use to help you achieve your dream of home ownership.