'How will the Australian property markets perform for the rest of 2021 and into next year?'
This is the pivotal question people are asking now that the nation’s real estate markets are largely functioning normally again.
Most economists forecast that property prices will keep pushing higher next year as the Australian economy’s stronger-than-expected recovery gains momentum and loan finance remains cheap.
There is an excellent chance that prices will continue rising after that, market experts say, even though prices in some areas may start to moderate and return to their long-term percentage annual growth rates of low, single digits.
New Long-Range Outlooks
There’s little doubt there has been a turnaround in the long-range outlooks for Australia’s capital city markets.
Economists and banks - some of whom predicted at the start of 2020 that Australian property prices could fall 30 per cent - have almost all radically overhauled their forecasts.
These days, they are much more upbeat. A report released recently by ANZ Bank forecasts house prices at the national level will rise by a robust 17 per cent through 2021, before easing to 6 per cent in 2022.
ANZ expects Melbourne house prices to rise by more than 16 per cent over 2021.
Government Intervention Likely
If these forecasts prove correct, buyers and sellers can expect Federal Government intervention in the market to check the rate of price growth. ANZ senior economist, Felicity Emmett expects the Australian Prudential Regulation Authority (APRA), to introduce macroprudential measures to slow house price growth into 2022 if prices continue to spike up.
Other banks also anticipate restraints on lending to be introduced. National Australia Bank chairman, Phil Chronican, says mortgage lending curbs would make sense if regulators wanted to take some of the heat out of the hot housing market, which has been stimulated by ultra-cheap debt.
But the leading banker notes that any such move to put the brakes on housing lending would only have a temporary impact on house prices, which are ultimately being inflated by inadequate supply and cheap money.
Mr Chronican says rapid asset price rises are the expected result of record-low interest rates.
“We are running an extraordinarily accommodating monetary policy with interest rates at levels that none of us can remember because they are completely unprecedented,” Mr Chronican told a recent Governance Institute lunch in Sydney.
“We shouldn’t be surprised that that’s going to show up in price inflation in some form or another. At the moment, we see that in asset price inflation, and it’s not just real estate, we’ve seen financial assets as well.”
‘Rational’ Lending Restrictions
If policymakers wanted to continue getting the economic benefits of very low rates without the surge in asset prices, he says intervening in the market through credit restrictions, known as macroprudential policies, would be a “rational response.”
The Commonwealth Bank has also upgraded its property price growth forecast for 2021 from 8 per cent to 10 per cent, the CBA’s Chief Executive Officer Matt Comyn told a recent Parliamentary hearing in Canberra.
“We expect house prices will continue to grow during this calendar year and the next but not at the rate that we’ve seen in February and March, which is quite rapid,” Mr Comyn says.
“We were thinking 8 per cent, and we are now thinking 10 per cent. We are not overly concerned with what we see at the moment in the context of broader financial stability.”
Westpac is even more optimistic about the continuing strength of the market.
“We have a forecast of 10 per cent housing prices increase for this year and next year,” says Westpac’s Chief Executive Peter King, who also addressed the Parliamentary hearing.
During the early part of 2020, Melbourne house prices lost some momentum because of the city’s extended lockdown, which severely impacted market activity. Since late October, the Melbourne property market has rebounded strongly and is on track to deliver double-digit capital growth over the next year, with houses outperforming apartments.
According to the analyst group CoreLogic, Melbourne housing values are now at new record highs, increasing 5.5 per cent for the three months to May.
CoreLogic says home values in Melbourne lifted 1.8 per cent in May. The data tracker also reports Melbourne has had the weakest annual performance for home values of all the capital cities, mainly due to the city’s 2020 lockdowns.
It’s a weakness that is set to be upturned.
In June, auction clearance rates were at boom-time levels, with the Real Estate Institute of Victoria (REIV) recording more than 2,613 auctions. Some 1,956 properties sold - 1,313 at auction, with 338 passed in. A further 642 properties were sold before auction. The clearance rate averaged 87.25 per cent, up on May’s 83 per cent.
Stronger-Than-Anticipated Economic Recovery
The Australian economic recovery remained strong in the March quarter, with Gross Domestic Product, or GDP, up 1.8 per cent.
Australia appears to have experienced the “V-Shaped” economic recovery that few thought it could, with the nation’s GDP now standing higher than it was at the beginning of the pandemic.
The reality is that 2021 is shaping up to be a year of economic recovery after a challenging end to 2020. The speed of the post-COVID recovery continues to surprise most economists. The ANZ research now forecasts wages growth of 3 per cent and inflation above 2 per cent, suggesting it “would not be out of the question that the RBA could tighten earlier than the second half of 2023”.
The Tax-Free Factor
Property commentators often argue that interest rates are the “main driver” of real estate markets. But what is even more influential on confidence levels in the market is that every homeowner’s principal place of residence remains a tax-free investment. This makes the family home a very advantageous store of wealth. So, it’s little wonder that millions of Australians are prepared to spend more on housing than they do on other asset classes, such as shares.
Nelson Alexander director Arch Staver, says people are increasingly looking for safe-haven investments. He says the 16-office team at Nelson Alexander are now seeing many more investors active in the market.
Other residential buyers are opting to trade up to a more expensive and/or larger home. Many of these people would instead put excess funds into their homes than rely on investments in the share market, which is being seen as increasingly volatile.
“Your gains on a family home sale are tax-free,” Mr Staver says.
“The family home remains the one major asset that does not attract tax.”
The lockdown experience has put a spotlight on space at home, whether that’s a big backyard, roomy work-from-home areas, or a larger-than-normal apartment for families and couples. Mr Staver says a readiness to pay more for spacious homes is a crucial driving factor in the market expected to continue into 2022 and beyond.
Confidence on the Up and Up
CoreLogic research director Tim Lawless, says the primary reason for the strength of Melbourne’s market is that demand for housing outweighs supply, which is being spurred on by the prospect of low mortgage rates remaining for an extended period.
“A surge in consumer optimism, thanks to economic conditions consistently exceeding expectations, is adding to confidence in the housing market,” he says.
Meanwhile, respected property market researcher SQM Research agrees there are more property buyers than sellers. The research house says with the Reserve Bank of Australia re-affirming that interest rates are likely to stay low for a long time, the evidence indicates the market will continue to go up from here, particularly for free-standing houses.
SQM estimates the prices of free-standing properties in Sydney are up close to 20 per cent in the past year, with similar properties in Melbourne up between 12 per cent and 14 per cent.
Like many other researchers, SQM believes Australians are seeing “a strong cities market” that is unlikely to taper off anytime soon.
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