Natural headwinds may be working to slow the rate of property price growth. Image – Canva
  • As properties become more and more expensive, natural headwinds are slowing the rate of growth down
  • Covid outbreaks, falling auction clearance rates, low population growth are all keeping a check
  • Meanwhile, property prices continue to rise, and some pundits expect this to continue for a while

The natural movement of ‘free’ markets has entertained economists for centuries, and this year’s Australian property market makes for an interesting case study.

Eighteen months ago as we came into 2020, everyone was expecting a normal year in the real estate industry, perhaps 3% growth, something contained, sustainable, and, well, normal.

How wrong we were.

By Easter 2020, pundits were predicting 20% to 30% slumps, and yet by September, the same commentators were saying we would have record growth.

To the first prediction, there was a mid-year slump – understandably – as the shock of the pandemic arrived quickly, and receded slowly.

Towards the end of 2020 pent up demand, and pent up people, had decided it was time to upgrade, move or sell. Some had already moved to the regions anyway, within a 2- to 3-hour commute from the cities.

Without recourse to spending on overseas holidays, money was ploughed into home renovations (JB Hi-Fi and Bunnings benefited) and buying and selling real estate. The boom was on.

Towards the end of 2020, the markets started to move, and by early 2021 were accelerating at a rate not seen since the 1980s. One way of thinking about it was that a year’s worth of growth had been condensed into 3 months.

Taking those early months of 2021 out of context gave rise to some exciting headlines about property price growth. Fear of missing out lead others to join in, and the whole market roared along.

This all seemed fine and dandy, except for those that could not get into the market in the first place watching rental moratoriums end and the ensuring ever-tightening market for rental properties.


[Select part of the chart to zoom in on various years, and ‘reset zoom’ button to return]

The headwinds

All this rampant property price growth had to come to an end sometime.

And although the RBA feels it is still not yet time to raise interest rates to cool everyone’s heads – they may very well be right – some inbuilt factors are suppressing the rate of property price growth anyway.

Firstly, there is a limit to what people can pay for real estate. Properties are rising faster than wages, so in real terms for buyers, real estate is becoming less and less affordable.

All this property price growth sounds great on paper, but if you are selling in this market, you may very well be trying to buy in this market. Are you really better off?

With fewer and fewer expats allowed back into the country, and minimal population growth, the fundamentals suggest that the platform that usually underpins the market (population growth) is not there to sustain double-digit growth for much longer. Australian population actually went backwards last year for the first time in a century.

Although investors have been coming back into the market to some degree in 2021, they are still down from long term averages.

“Investors are still a smaller than normal share of mortgage demand, comprising 28% of mortgage activity by value compared with a 10yr average of 35%.”

Tim Lawless, CoreLogic, quoted yesterday

Various Covid outbreaks, and Australia’s relatively slow response to vaccinations, have meant there have been three snap lockdowns imposed in Perth alone this year, which had been leading the country in suppressing the virus altogether. Meanwhile, after holding out against lockdowns for months, NSW has just extended its lockdown further.

Auction clearance rates, which were hitting 80% to 90% in the earlier part of the year, have snuck back in to settle around the mid-seventies.

What now?

Although still heading northwards, the rate of house price growth has eased off since March. Given all the headwind factors above, this is not surprising.

The market seems to be a delicate dance at the moment, with all eyes on the RBA as to when they will be forced to raise interest rates – which remember, are still at an all-time low of 0.1%. The Bank itself has said they will not be raising them until wage inflation is around 2% to 3% and unemployment is below 5%, and we are not there yet.

We shall see.

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