Rising property prices, low interest rates lead to record housing debt

Housing debt levels have hit a record high on the back of soaring property prices new data reveals.

CoreLogic Head of Research Eliza Owen has analysed the six lessons learnt during the pandemic, identifying that the record low cash rate of 0.1 per cent, in place since November 2020, had enabled Australians to access more credit.

“Rapid increases in housing and rent values in the past two years was largely the result of a sizable reduction in the official cash rate,” Ms Owen said.

“Total outstanding housing credit sat at a record high of over $2 trillion, according to the RBA, while the ratio of housing debt to household income was at a record high 140.5 per cent.

“While total outstanding credit reached over $2 trillion in January, ABS data shows monthly new finance borrowed for the purchase of property continued to hit fresh record highs through January 2022, at $33.7 billion.”

Ms Owen said high debt levels and stagnate income growth had put certain areas of the housing market at risk.

​​”It is important to frame debt levels in the context of high asset values, and relatively low interest costs,” she said.

“RBA data shows housing interest payments to income have fallen to their lowest levels since 1999, and household debt has trended lower as a portion of housing values.”

Source: CoreLogic

Ms Owen noted that the gap between houses and units had never been more pronounced.

The median Australian house value rose 29.8 per cent, or $182,000, above the median unit value, which was up from just 8.5 per cent, or $44,000, in March 2020.

“Both the composition of the buyer pool and the impacts of COVID may have contributed to a record gap between house and unit values,” she said.

“Investors, who may have a preference for units, have been a relatively small part of demand through the upswing.

“Additionally, detached houses may have been in higher demand as Australians spent more time at home through the pandemic.

“Government policies such as the HomeBuilder grant may have also contributed to increased detached housing demand, due to tight construction timelines to qualify.”

Ms Owen said house values soared 25 per cent to record highs despite weakness early in 2020.

“The index had a relatively small decline at the onset of COVID-19, with sales and listings volumes being far more impacted than prices,” she said.

“National home values declined 2.1 per cent between April 2020 and September 2020, before soaring amid low interest rates, high household savings, government grants and a sharp reduction in the supply of housing.”

Ms Owen said a huge part of the initial increase in house prices was driven by first-home buyers capitalising on government incentives similar to during the Global Financial Crisis.

“The spike mirrors first-home buyer participation in 2009-10, which marked a temporary boost to the First Homeowner Grant,” she said.

“Since the January 2021 peak, first-home buyer activity has diminished, reflecting higher barriers to entry as housing values substantially outpace incomes.”

Ms Owen said despite rents increasing 11.8 per cent to record highs, not all markets were the same.

“The headline numbers hide the diversity of rental conditions,” she said.

“Through the pandemic, there has been a clear shift in rental preferences towards lower density housing options, where the upwards pressure on rents has been more substantial.

“This trend has evolved over the past year, with rental affordability gradually deflecting more demand towards higher density rental options where the cost of renting is more affordable.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.