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Managing Director (BCom, LREA, MDIA)
May 2021
The Home Builder Grant ($25,000 reduced to $15,000) and First Home Buyers Grant ($15,000) have stimulated huge demand for newly built homes. On top of this JobKeeper, JobSeeker and other initiatives have pumped billions of dollars into the Australian economy. The JobKeeper subsidy has now finished, JobSeeker Coronvirus supplement has ceased, Home Builder Grant applications closed on 14 April 2021 and other government stimulus is being reduced. The Australian Government has pumped more than $137 billion into the national economy as part of its economic response to COVID-19. This equates to almost $7,500 for every person over 18 years. From 31 March 2021, this financial tap has been turned off.
Total listing numbers are lower than demand and houses are being sold faster than they are listing, creating a significant supply/demand imbalance. However, in the 4 weeks leading up to 1 April 2021, new listings increased 8.1% from a year ago. Home-owners are starting to make more enquiries about selling and listing numbers are likely to increase in coming months.
The national home value index has risen at its fastest pace in 32 years. Rents are soaring – residential rents are increasing in almost every postcode across the country. This is fueling investor interest to get back into the property market. The April 2021 national report from CoreLogic rpData suggests there will be substantially less fiscal (financial) support going forward and there is already the prospect of tighter credit policies. Anecdotally, we are already seeing bank loan approvals taking longer than expected with finance extensions being sought across many sale contracts.
There has been a massive increase in First-Home Buyer (FHB) activity, which has doubled in the past 12 months to make up 40% of all property purchases. Government support for first home buyers will likely reduce over the coming 12 months. This factor along with record low interest rates is driving a ‘Fear of Missing Out (FOMO)’ amongst first home buyers. The frenzy we are currently experiencing as part of this property boom is likely to subside within the next 6 – 12 months.
The Reserve Bank of Australia (RBA) cash rate is currently 0.1%. Home buyers can get 4-year fixed rates at less than 2%. Given the size of many loans are now at record levels, even small movements in interest rates are likely to have a significant cooling effect on the property market.
In March 2021, the average Australian home loan size was $538,941. For first home buyers, the average loan size was $446,723. In May 2021, Commonwealth Bank (Australia’s largest lender) started lifting interest rates and other banks are following suit.
The International Monetary Fund (IMF) has urged the Reserve Bank and economic regulators to tighten lending standards to deal with the potential negative fallout from high levels of business and household debt caused by record low interest rates.
When it comes to bonds (Learn more: what is a bond?), traders are pricing them based on how they see the economy, and inflation, in three months or three years’ time from now. Today, they see interest rates higher than the Reserve Bank would prefer to see (or at least the “target” rates it’s stated publicly). The Reserve Bank is of the view that the cash rate is unlikely to move before 2024, but the market is now starting to price in a rate increase as soon as next year.
Australia’s household debt is amongst the highest in the world and is getting worse. As house prices and loans increase at the fastest pace in more than two decades, more analysts and economists are expecting regulators to step in with macroprudential tightening (i.e. making it harder to get loans approved).
The RBA March 2021 Report on the Australian Economy & Financial Markets shows household debt is still at an uncomfortably high level. Housing loan commitments are at an all-time high and any significant drop in house prices or upward movement in interest rates would be catastrophic for many households.
The five key risks that the Australian Prudential Regulation Authority (APRA) monitors to step up its restrictions on lending have started to rise. These risks are:
The RBA, APRA and Australian Government will be keeping a close eye on a range of key indicators over coming months. These include:
Taking the above 6 factors into account, there are clear reasons why the property boom will likely run out of steam over the next 6 – 12 months. However, the Australian Government, RBA and the banks run Australia’s ‘Housing Casino’. It’s in their combined interests for the house to win. If they keep giving away free casino chips, the property boom might go on for some time longer.
