Many property experts point to COVID-19 border closures to explain skyrocketing house prices, while some economists claim historically low interest rates are the key driver.
Neither is entirely correct though, and such simplistic assessments can have potentially dire ramifications for investors.
When you dive into the data, there’s evidence that many more factors other than any singular cause have contributed to the double-digit price jumps we’ve seen.
It’s important to understand the root causes of the crazy prices we’re seeing in cities and regional areas all over Australia, and not get caught up in hype and speculation.
Lazy appraisals lead to poor advice, driving investors into ill-informed property decisions.
It’s one of the key reasons I established InvestorKit, a buyer’s agency that relies on painstaking research and thorough data analysis to produce property insights and recommendations.
We’ve tracked the market every step of the way throughout the pandemic, with deep research generating unique insights.
The pandemic effect is real
Firstly, the elephant in the room.
Yes, the pandemic has had a marked impact on our housing market.
Yet many pundits got it completely wrong, predicting a massive and sustained market downturn.
The banks led the panic, forecasting a one-third drop in property prices. Instead, they’ve rocketed to all-time highs.
It’s true that as borders slammed shut, migration not only dried up but went into reverse.
More people left Australia than arrived for the first time in decades.
A traditional driver of housing demand disappeared virtually overnight.
What simplistic assessments tend to overlook is that we were already on track for a real estate boom even if COVID-19 didn’t happen.
A variety of other factors were also in play, and the pandemic just magnified their impacts.
Hidden drivers
Underlying it all was those historically low interest rates that economists like to talk about, and that has made money feel cheap and accessible.
Added to that, households were saving extra cash from the holidays they weren’t allowed to take, and had time to think about what to do about it.
Savings ratios shot up from a typical six to eight per cent to around 20 per cent (and have since settled to 10 to 12 per cent).
With transaction volumes fading due to the housing mobility issues, banks put their focus on mortgage refinances by providing substantial cashback offers and very low rates.
Households had time at home and uncertainty on their minds, sparking one of our largest refinance booms as people took control of their finances and further boosted their bank balances.
Add to that, grants and stimulus payments were in play – although it can be argued that many of the people who got extra cash, didn’t need it, while people who needed it, didn’t get it.
Spending directly to the pockets of people wasn’t the only stimulus in play, substantial amounts of funds have flowed through to infrastructure projects adding jobs and creating economic activity.
Energy, transport, social and medical infrastructure spending has been on the rise across many cities, not just concentrated to our largest cities.
As a result of this and the demand internationally, our resources sector has moved from strength to strength.
Additionally, you had a different type of migrant moving into the market – the returning expat.
Typical migrants usually rent for about the first four years before becoming owner-occupiers, but expats arrived with pockets loaded down with cash and serious purchasing intent even before they hit our shores, often transacting from overseas.
Lifestyle perceptions also played a key role in how we responded to a seemingly endless pandemic.
Older Australians brought forward retirement plans, including downsizing their main abode, or adding an investment property to their income stream.
Families who suddenly found themselves locked down in high-density living looked to trade into something with a backyard.
Meanwhile, commuters able to work from home suddenly saw no impediment to making a treechange or seachange, which supercharged already solid housing demand in regional areas.
Adding fuel to the fire
Not all factors relate directly to the pandemic.
Interest rates have been low for a long time, and regional migration has been happening for decades.
Another contributing factor is that we went through a peak apartment boom around 2012 to 2015.
Since then, building approvals have fallen off a cliff, so low supply has helped stimulate demand.
In the background, constant attacks on housing policy and changes to investor lending have created a long-term impact of reduced investor activity in the lead-up to COVID-19, according to ABS data.
Reducing investor participation equates to a drop in rental stock, combined with the drop in construction over the years prior we saw rental vacancy rates substantially decline.
It’s only in this recent boom that investors have come back in numbers.
What now?
As we shift into the next phase of becoming a predominantly unrestricted society with opening borders, one thing that could happen is people will have that pent-up feeling of wanting to spend again.
Some of that cash is going overseas as people start travelling again. But the reverse is also true, with a huge backlog of people wanting to call Australia home.
Unemployment could factor into this picture.
Jobs that typically filled by migrants have been taken up out of necessity by locals, and as soon as migrants return a proportion of locals will become unemployed, which could spook people off making large purchasing or investing decisions.
Increased people mobility going into 2022 will result in our property boom continuing its course across many cities, with our buyers agency and research business (InvestorKit) expecting that at least 34 of our 50 largest cities will achieve double-digit price gains.
However, many cities with increased mobility will see their housing inventory get tested as vendors gain confidence to start listing and moving from location to location.
It’s important to understand that it will be a complex and interconnected series of factors that informs what happens next, rather than simplistic prognostications or attention-grabbing headlines.
Reopening borders and interest rates that will stay low – my prediction is that they don’t move up as fast as people think with the RBA unlikely to end or taper off its bond buying program as soon as many predict.
But the most useful tip I can give investors is to find trusted insights that rely on expert analysis.
In unprecedented times, that’s how you stay ahead.
