Erin Delahunty - 15 Mar, 2021

Why didn’t the Australian housing market crash?

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When Australia was in the grips of the coronavirus crisis last year, doom and gloom was predicted for the housing market.

From as early as March, property experts and the big banks warned prices across the country could tumble by at least 10%.

Worst-case scenarios suggested they might even fall by up to 32% if Covid resulted in a prolonged downturn and an extended period of high unemployment.

And while 2020 proved devastating for many households, businesses and individuals, the housing market didn’t crash. This was despite the Australian economy technically being in recession.

CoreLogic data shows values fell -2.1% between March and September, but by October, the recovery was on.

In that month, the value index moved back into positive month-on-month growth, posting a 0.4% rise, and by December rose a further 1%. Overall, Australian home values, including houses and units, ended 2020 a respectable 3% higher than the year before.

CoreLogic’s research director Tim Lawless said 2020 was characterised by a “mild COVID dip in values”, but also “unprecedented volatility” in the transaction space.

“Despite the volatility, housing values showed remarkable resilience, falling by only -2.1% before rebounding with strength throughout the final quarter of 2020.”

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Domain’s House Price Report, released in January, showed house prices rose, quarter on quarter and year on year, in every Australian capital city, many reaching record highs. For units, results were more mixed, but still strong.

The median house price in Sydney now sits at an all-time peak of $1,211,488, Melbourne at $936,073 and Canberra at $855,530. Darwin and Perth were the only capitals that didn’t reach previous price peaks in 2020.

Domain senior research analyst Dr Nicola Powell described the resilience of the market as “pretty remarkable.”

She said owner-occupiers and first-home buyers had both been encouraged by low-interest rates and had fewer investors in the market to compete against.

Once auctions returned in full force, they were popular with buyers too, with good clearance rates reported.

But why didn’t the Australian housing market crash? And why is property still seen a solid investment?

CoreLogic’s head of research Eliza Owen said numerous factors contributed to the prevention of a larger downturn in dwelling values and continued faith in the market.

These factors included the institutional, coordinated response to the pandemic, which led to low borrowing costs, added incentives for first-home buyers and the extension of mortgage repayment deferrals, which limited forced sales.

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Low-cost debt

The cost of borrowing money is always one of the biggest influences on property value. And 2020 was no different, according to Owen.

Across the year, the Reserve Bank of Australia reduced the official cash rate target – which influences lending rates – by 65 basis points to 0.10%.

“In a bid to stimulate economic activity, the reduced cash rate lowered bank funding costs, leading to record-low mortgage rates. This relationship has held up historically, with RBA research previously suggesting a 100 basis point reduction in the cash rate can lead to an 8% increase in property values over the following two years,” Owen said.

She said it’s not uncommon for housing markets to increase in value during negative economic shocks or periods of rising unemployment.

“This is because the monetary response to rising unemployment and falling consumption is often to lower the price of debt. Those that still have a secure income during these shocks may be more inclined to borrow and buy as a result.”

Like any other buyers, low interest rates appeal to first-home buyers.

Government initiatives like the First Home Loan Deposit Scheme, HomeBuilder and stamp duty cuts, when combined with these “record-low interest rates, a halt in population growth and pullback in investor demand, made an almost perfect window for those with secure employment to buy their first home”, according to AMP Capital chief economist Shane Oliver.

It was also a good environment for those looking to refinance their home to buy an investment property.

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Mortgage deferrals

The decision by lenders to allow home owners to defer mortgage repayments was another reason the market didn’t collapse, Owen said.

The deferrals acted “as temporary stoppers to forced sales due to economic uncertainty or inability to repay mortgage due to job loss or extended unemployment,” she said.

“In the case of large-scale mortgage debt, ongoing arrears can lead to forced sales, which in turn fuel risks associated with higher supply in the housing market, lower values and higher rates of negative equity, where the borrower sells their property for less than what they owe the bank.”

Deferrals meant stretched home owners who didn’t want to sell, didn’t have to.

“This may have contributed to very low levels of stock throughout 2020, which only reduced further amid stage two restrictions from March. The low level of stock on market likely helped to insulate dwelling values during this time,” she says.

Owen said continued leniency for mortgage repayment deferral, particularly for owner/occupiers, remains in the interest of the banking sector and extends the “bridge to recovery” as the economy gradually mends.

“It’s worth noting indebted households do ultimately pay for mortgage repayment ‘holidays’. With unpaid interest capitalising on their loans, these households will be further indebted down the line, which may constrain their future consumption, particularly in the event of another shock to the economy. For now, however, it is a policy which has helped to stave off further deterioration in housing markets,” she said.

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Those hit hardest were renters, not owners

A third, important factor that may have insulated parts of the housing market was the specific nature of the economic downturn, Owen said.

“Those working in food and accommodation and arts and recreation have seen devastating job loss through the pandemic. However, those working in this industry are less likely to have mortgage debt.

“The decline of employment in these sectors likely contributed to severe pockets of rental income decline, but the investor servicing debt may be able to hold on to the asset while it is temporarily vacant,” she said.

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The future looks bright

While recent outbreaks have shown Australia isn’t out of the Covid woods yet, property experts such as Domain’s Dr Powell, believe the future for property remains bright.

“With the historically low interest rates likely to stay for the near future … we’ll see more price growth throughout 2021.”

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Words by Erin Delahunty


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