A surprisingly good year lies aheadMon, 18 Jan 2021
Recently across Australia the business media have published a number of articles all reporting that the feared Covid-19 property price crash of 2020 never happened. So, what indeed did take place that made all the pundits eat their words?
Simon Pressley, the founder of buyer's agency Propertyology, was one of the few forecasters that did not expect a dramatic price drop when predictions were being made at the highest point of the pandemic's first outbreak: "The history books will show it as a small moment in time at the front end of an Australian property boom that commenced in the third quarter of 2019 and continued for a few years," he said.
He says that coronavirus may have changed peoples' lifestyles, but not the market fundamentals that traditionally drive price booms on the back of high-demand and low supply.
"All things being equal, Australia has just commenced an era of accelerated rates of home ownership and wealth creation, in a manner not seen since the five years ending 2005," Mr Pressley said.
"Property is shelter, an essential commodity, not an 'index' on a bean-counter's computer screen. It is a fact that Australia had a national shortage of shelter available for sale and for rent immediately before COVID-19.”
But at that time Mr Pressley didn’t have a lot of company. In the first quarter of 2020, as the pandemic’s dangers were being translated into predictions of severe economic impacts, Australia’s major banking economists issued warnings predicting a coronavirus-induced recession that would cut property values by ten per cent, fifteen per cent or even more.
Sydney, with the nation’s highest property prices, would be especially hard hit, they posited.
By May the major banks, including NAB and the Commonwealth Bank, were anticipating Sydney prices to crash by up to 30 per cent if all went as expected.
But by November, just six months later, prices were rebounding in all capital cities with CoreLogic data showing a lift of just under one per cent nationally while the value of home loans shot upwards by 30 per cent.
Household savings have risen dramatically as many households have been saving money by not being able to travel overseas or dine out as much as in previous years. Households have saved an estimated $119 billion over the past year, a large part of which could be converted into property purchases, pushing up prices in 2021.
Much of the credit for preventing the threatened ‘crash’ must go to the Reserve Bank lowering the prime rate to record low figures and to actions taken by federal and state governments. These actions include a $25,000 HomeBuilder grant for those building a new residence, and record levels of fiscal stimulus that included the JobKeeper wage subsidy program that kept unemployment in check.
Behind the scenes the Reserve Bank offered up to $200 billion in cheap money to commercial banks, to help them lend to small businesses and keep mortgage interest rates down while keeping the economy ticking over.
Late in the year tax cuts in the federal budget were introduced that boosted take-home pay; CBA estimated a full-time worker on an average salary would get a 1.6 per cent pay increase in fiscal 2021 even without any changes to their wage.
And in December, the Australian Office of Financial Management (AOFM), which oversees the federal government's debt sales, confirmed the government’s move into negative rate territory. Investors have bought more than $500 million of federal government debt with a negative interest rate, which is significant because this is the first time a Treasury note, where the interest rate is fixed, has been sold at a negative level.
Mostly optimistic forecasts
Property data house SQM Research says it is now expecting prices to jump by seven to eleven per cent in Sydney in 2021; it also expects national prices to increase between five and nine per cent.
A "strong surge in prices" is also the prediction of REA Group chief economist Cameron Kusher who says the recent price growth may start accelerating during 2021. However, he points out that there has been a major shift in housing market dynamics in terms of the loss of demand for new developments from arriving migrants.
Reserve Bank of Australia governor Philip Lowe echoed this concern when he said at a public hearing in Canberra it was a good time to buy property but pointed out that the fundamentals had changed with far fewer migrants coming to Australia due to international travel restrictions.
Independent economist Stephen Koukoulas says record low interest rates, a relaxation of lending restrictions and entering the spring selling season were behind the revival but doesn’t think there’s any kind of a “price boom" going on.
"We might just be getting a release price spike of [up to] 5 per cent early in the new year but once we get well into 2021, the reality of not many people being here and ... a pipeline of construction yet to be finished will bite," Mr Koukoulas said.
The big banks are generally upbeat in their expectations for 2021. NAB released their most recent Quarterly Australian Residential Property Survey just before the end of the year. In it, the bank forecasts price growth in Sydney to be 4.4 per cent in 2021, rising to six per cent in 2022.
Westpac economists are also optimistic with their latest forecast predicting a rise of 14 per cent over the next two years. Chief Economist Bill Evans and Senior Economist Matthew Hassan said this forecast is due to a combination of factors that will work together to boost the market.
“The recovery will be supported by sustained low rates, which are likely to be even lower than current levels; ongoing support from regulators; substantially improved affordability; sustained fiscal support from both federal and state governments; and a strengthening economic recovery,” the two economists wrote.
More figures from Westpac showed that confidence in the Australian housing market has boomed with the Westpac Melbourne Institute consumer survey recording a strong surge in November, rising 23 per cent to 132 – a seven-year high for the index and well above pre-COVID-19 pandemic levels.
Commonwealth Bank of Australia’s head of Australian economics Gareth Aird told Domain that improving consumer sentiment, low interest rates and cashed-up households were fuelling price growth.
“You’ve got a few forces that are all pointing to higher house prices,” he said. “Some of the forward-looking indicators like lending have increased quite quickly in the past four months.”
He said property markets around Australia showed no signs of slowing in 2021: “The price people are willing to pay for an asset is going up and property is no exception,” he said. “You’re either renting or you’re an owner-occupier and if the borrowing costs come down … then it’s a very natural response.”
Growth at both ends of the market
Despite the pandemic, 2020 was a boom year for so-called ‘trophy homes’ almost from start to finish. In fact, it was one of the best years in decades due in part to pandemic conditions creating widespread appreciation for luxury housing in a lockdown. As Domain’s Lucy Maken put it: “No house was deemed too big nor any commute too far as the humble home was forced to juggle as sanctuary, office, school and gymnasium for the whole family, prompting a slew of records across Sydney’s outer urban and oceanfront suburbs.”
Top dollar spot went to the $95 million duplex ‘Edgewater’ in Point Piper sold by the co-founders of Katie’s women’s clothing retail chain Joe Brender and his wife Gerda.The buyer of the two $47.5 million strata-titled apartments was businessman John Changjin Lin. Another eye-popping purchase was conducted by retired car dealer Laurie Sutton who sold his non-waterfront home in Darling Point for $32 million so he could buy the Elizabeth Bay waterfront mansion ‘Berthong’, formerly owned by Russell Crowe, for $33 million.
Runners-up in the Eastern Suburbs space race were Jason Huljich, from one of New Zealand’s wealthiest families, who traded his $4.7 million home in Elizabeth Bay to buy the Darling Point home ‘Callooa’ for $22.65 million, and stockbroker Rob Fiani who sold his $20 million Bellevue Hill property for a $34 million home in Vaucluse.
Other top-end sales included a six-bedroom house in Bellevue Hill, which sold for $16.08 million at auction in November, a result said to be more than $2 million above the reserve.
And for a change there were several trophy home sales on the north side of the Harbour Bridge that challenged the Eastern Suburbs in the mega-million sweepstakes. Former Vocation executive Brett Whitford sold his Mosman house for a reputed $21.8 million just a week before Christmas. Two iconic waterfront properties in Kirribilli sold for a combined $19.8 million at two auctions which attracted a total of 13 bidders.
Record sales were also achieved in waterfront suburbs Kurraba Point ($19.5 million), Cremorne Point ($16 million) and Gladesville ($10.25 million). Even without the benefit of a waterfront, other properties set their own suburban records in Warrawee ($15 million),
Turramurra ($10.25 million), Pymble ($9,875,000), Lindfield ($12 million), Roseville ($8.85 million), Kenthurst ($7.2 million), Belrose ($8 million) and Terrey Hills (about $10 million).
A bit further north, in February Palm Beach claimed its place as the most expensive holiday market in the country when fund manager Mike Messara paid $24 million for the weekender of the late media personality Sam Chisholm.
So that’s what happened in the Sydney market’s top end. But CoreLogic figures also show that the more affordable houses actually increased in value twice as fast as the champagne properties during 2020. An analysis of what it calls the ‘cheapest 25 per cent of property sales’ shows that the northern beaches, Fairfield, Waverley and Central Coast had the highest price rises for ‘cheap’ houses in Sydney over the three months to November.
Houses valued at less than $726,000 rose in price by 2.5 per cent and by 7.5 per cent over the year. This compares well with the more expensive homes - those above $1.5 million – where prices increased 1.1 per cent over the quarter and 4 per cent since 2019. The middle tier – homes worth about $1 million, increased 0.9 per cent over the three months to November and 5.2 per cent over the year.
CoreLogic head of research for Asia Pacific Tim Lawless explained that the cheapest segment of the housing market is usually more resilient to downturns than more expensive homes due to greater volatility in the top end of town. This also means more expensive homes tend to outperform their lower-priced counterparts during boom periods.
"This cyclical trend has been amplified by the rise in first home buyer numbers where demand for low to mid-priced properties has remained stronger through the COVID period," Mr Lawless said.
"Looking forward it's likely the more expensive end of the housing market will start to outpace the lower quartile, again due to the cyclical factors outlined previously, but also due to the potential for less activity from first home buyers as incentives expire and affordability pressures mount," he said.
More gains ahead
With property prices moving higher and low interest rates as well as more available finance, first-home buyers are returning to the market, with the number of owner-occupier first-home buyer loan commitments reaching its highest level in more than a decade.
“What we’re seeing now is a lot of pent-up demand that didn’t occur during COVID,” said Charter Keck Cramer director Angie Zigomanis.
Entry-level prices in Sydney have continued their rebound from the downturn, recording strong gains over the past year. Any slowdown seems unlikely as the strong demand for properties in greater Sydney that began in mid-2020 keeps on exceeding supply.
AMP Capital chief economist Shane Oliver said this was an almost perfect time for those with secure employment to buy their first home, thanks to low interest rates and government subsidies: “All these things added up to something which made it a lot easier for first-home buyers to get into the market,” Dr Oliver said.
“It’s like an almost perfect environment … a perfect day. But there are a few clouds around – the main cloud is that prices are still so expensive. At the same time the job market was very uncertain a few months ago, but it’s improved since.”
ME Bank’s head of home loans, Andrew Bartolo, said that he expected strong first-home buyer activity to continue through 2021 but noted it could moderate as the market continued to recover: “With property prices expected to rise in 2021 and investors re-emerging, we may not see the same levels of first-home buyers for too much longer,” he said.
So, in 2021, Australia’s residential prices have kept on with their upwards trend that began in the latter part of 2020. ABS figures show that the total value of Australia’s 10.6 million residential dwellings at year’s end had risen by $87.8bn to a record $7,283.3bn with a mean price of almost $700,000.
CommSec chief economist Craig James sees no end to the market’s rise: ‘Borrowing costs for Aussie households and businesses are at rock bottom, driving a housing market recovery, while encouraging firms to invest and hire workers,” he said.
“Super-low interest rates and an improving job market should keep home prices ticking higher,” he concluded.
‘Property expert forecasts 'double-digit' growth for Aussie house prices in 2021,’ Stuart Marsh, 9News, 30 December 2020
‘How 2020 became the year of the first-home buyer,’ Kate Burke, Domain, 2 January 2021
‘Government interest rate goes negative in $550m Treasury note sale,’ Shane Wright, Sydney Morning Herald, 10 December 2020
‘Cheap house price growth outstrips millionaire neighbours,’ Jennifer Duke, Sydney Morning Herald, 20 December 2020
How Sydney’s auction market fared in 2020’, Kate Burke, Domain, 28 December 2020
‘Australians ready to buy property in 2021 after record savings,’ Tawar Razaghi, Domain, 8 December 2020
‘Australia’s residential property prices keep on climbing, hit new total value record,’ Rebecca Le May, NCA NewsWire, 8 December 2020
‘Seven graphs that show why it’s so hard to find cheap house prices right now’, Elizabeth Redman, Domain 11 December 2020
‘Top sales of 2020: Millennials, tech heads and homes fit for lockdown dominate 2020’s bullish trophy market,’ Lucy Macken, Domain, 26 December 2020
‘What do economists forecast for the property market in 2021?,’ Emily Ng, Open Agent, December 2020
‘What happened to the property price crash that was predicted but never came?,’ Jennifer Duke, Sydney Morning Herald, 7 December 2020
‘Looking at Australia's house prices you could be forgiven for wondering 'what recession?', Greg Jericho, The Guardian, 10 December 2020