Australia Property Market A Roller Coaster Ride Since COVID-19
Table of Contents
Introduction
It has been four years since the World Health Organization declared COVID-19 a worldwide pandemic. The pandemic has had far-reaching effects on society, including changes in the housing market and conventional thinking about home prices. CoreLogic, a leading research firm, has published a research paper examining the developments in the Australian property market during the pandemic and whether this roller coaster ride is likely to be repeated anytime soon.
Home Prices
The most noticeable change in the housing market since the onset of COVID-19 has been the extraordinary surge in home prices. According to CoreLogic’s Home Value Index, home prices in Australia have increased by 32.5% since the start of the pandemic, adding approximately $188,000 to the median value of a home. This surge in prices is significantly higher than the growth in average wages over the same period.
However, the rise in home prices has not been a smooth upward trajectory. There have been two instances when prices temporarily declined, but the overall growth has been strong enough to offset these losses. Initially, home values fell by 1.7% between March 2020 and June 2020, before surging 30.8% higher due to record low interest rates. From April 2022, the market experienced a 7.5% slump as interest rates rose. Surprisingly, despite the continued increase in interest rates by the Reserve Bank of Australia, the housing market rebounded from February 2023 due to high demand and a low number of homes for sale. By the end of February 2024, home values were 9.5% higher than the previous year.
Uneven Growth Across the Country
The growth in home values has not been evenly distributed across Australia. Markets like Adelaide, Regional South Australia, Perth, Regional WA, Brisbane, and Regional Queensland have experienced more than 50% growth in home values since March 2020. On the other hand, Melbourne has seen a more subdued performance, with values only increasing by 11.0%. This can be attributed to frequent lockdowns and weak demographic trends in the city.
Tight Rental Market
One surprising outcome of the pandemic has been the tightening of the rental market. Despite initial border closures and the departure of thousands of students and temporary migrants, rental vacancy rates decreased significantly. This tightening in supply can be attributed to smaller households amplifying rental demand, followed by a surge in net overseas migration once international borders reopened. As a result, rents across the country have surged by almost a third (+32.4%) since the start of the pandemic, with the median rent now approximately $150 per week higher. This is in stark contrast to the previous four years, where national rents only increased by 4.6%.
Impact of Interest Rates
Monetary policy, particularly emergency-low interest rates, played a crucial role in stimulating housing demand during the pandemic. However, as interest rates were raised by the Reserve Bank from May 2022 to combat inflation, activity in the housing market temporarily dampened. Many borrowers took advantage of low fixed mortgage rates in 2022, leading to speculation of a “fixed rate cliff” as fixed-rate lending terms expired. Surprisingly, borrowers have managed to navigate higher mortgage rates better than expected, with mortgage arrears remaining below pre-pandemic levels. The lack of housing supply, a tight rental market, and cashed-up buyers not requiring finance have contributed to the continued increase in home prices, despite high interest rates and a per-capita recession.
Accelerated Demographic Trends
The pandemic has accelerated demographic trends in the Australian housing market. Demand for housing remained strong despite closed borders due to the formation of smaller households. The average Australian household size decreased from 2.55 people in late 2020 to a historic low of 2.48 people in August 2022. Although the reduction in average household size may not seem significant when applied to the entire population, it has added approximately 120,000 households to overall housing demand. Internal migration patterns also favored regional Australia during the first two years of the pandemic, while the reopening of international borders led to a spike in overseas migration. Although population growth is slowing, net overseas migration is expected to remain above pre-COVID levels in the coming years, further increasing housing demand.
Challenges for Builders
The pandemic, along with global developments like the war in Ukraine, has created challenges for builders in the Australian housing market. Government stimulus programs like “HomeBuilder” overheated the residential construction sector, leading to supply-side issues for land, materials, and labor. Construction costs have also jumped significantly, causing liquidity pressures for the residential construction sector and pushing many builders into administration. The time it takes to build a new home has increased from an average of 2.2 quarters to 3.1 quarters, with even longer delays for higher-density dwellings like apartment blocks.
Future Outlook
Unless another event like a global pandemic occurs, it is unlikely that the Australian housing market will experience a similar period of turmoil. The unprecedented growth in home prices during the pandemic was a result of supply and demand imbalances. Going forward, gradual price gains are expected, especially when interest rates start to decrease again. It is possible that there might be another cyclical upswing, but it is likely to be more limited in an environment of higher interest rates compared to pre-pandemic levels.
Conclusion
The Australian property market has experienced a roller coaster ride since the onset of COVID-19. Home prices have surged, rental markets have tightened, and demographic trends have accelerated. Despite challenges for builders and the impact of interest rates, the housing market has remained resilient. The future outlook suggests a more stable and gradual increase in home prices, with the potential for another cyclical upswing when interest rates decrease. Overall, the Australian property market has undergone significant changes during the pandemic, and its effects are likely to shape the industry for years to come.
Keywords: Australia property market, CoreLogic, home prices, rental market, interest rates, demographic trends, challenges for builders, future outlook.
