Why didn’t the Australian property market crash?

At the onset of the pandemic, experts believed that property values will witness a national decline of 10 per cent, with worst-case scenarios suggesting prices could fall by as much as a third.

However, between the same period, Australian home values have fallen just 1.7 per cent. In fact, October marked a 0.4 per cent increase in values, with the trend over November suggesting a further acceleration in growth, CoreLogic noted.

While Melbourne housing values remain around 5.4 per cent below their recent high, and Sydney housing values are still 4.8 per cent below their 2017 peak, smaller capital cities are thriving amid these uncertain times.

“Values in Perth and Darwin are more than 20 per cent below their 2014 peaks, while the remaining capital cities have seen housing values move to new record highs through the COVID period,” Ms Owen highlighted.

Mild downturn

According to Ms Owen, the mild downturn in property values could be attributed to a few factors, which ultimately explains the relative stability in housing at a high level.

For one, the cost of borrowing money has influenced property values in recent times, with the RBA reducing the official cash rate target (which influences lending rates) by 65 basis points, to 0.1 per cent.

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

“In fact, it is 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.”

Further, mortgage repayment deferrals have 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.

“Mortgage repayment deferrals may have contributed to very low levels of stock throughout 2020, which only reduced further amid stage 2 restrictions from March. The low level of stock on market likely helped to insulate dwelling values during this time.”

Ms Owen believes that continued leniency for mortgage repayment deferral, particularly for owner-occupiers, is in the interest of the banking sector, and extends the ‘bridge to recovery’ as the economy gradually recovers.

However, indebted households are advised to be careful about their finances despite the cushion provided by 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,” Ms Owen said.

Finally, the third factor that may have insulated parts of the housing market from drastic declines is the specific nature of the economic downturn, according to her.

Severe job loss across hospitality, tourism and the arts resulted from the purposeful slowdown of ‘social consumption’. “However, those working in this industry are less likely to have mortgage debt,” Ms Owen highlighted.

“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.”

“It is worth noting that prolonged declines in rental markets do ultimately pose risk to values. An example is inner-city Melbourne, which has high exposure to rental demand from overseas migrants. Median asking rent values across the Melbourne SA2 market have fallen 24.2 per cent between March and October. This highlights reopening international travel and migration as a key part of bolstering rental income from property.”

Ultimately, these three factors together contributed to stability in the housing market in certain levels amid the COVID-19 outbreak.

Looking forward, Ms Owen expects further reductions in fiscal support, but dwelling values are still likely to continue rising off the back of the November cash rate reduction, converging with a recovery in consumer sentiment and economic conditions.

“A strong institutional response and the manufactured nature of the current downturn has moderated the impact of COVID-19 on the housing market, and would be further buoyed by the ongoing containment of the virus,” she concluded.