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6 Key Reasons why the Property Boom will be over within 6 – 12 months

Sean McCreanor

Sean McCreanor

Author / Managing Director

May 2021: The Australian Property Market is experiencing a boom that defies rational economic thinking. Every capital city and most regional towns are experiencing unprecedented levels of buyer demand. Many properties are sold within days. There are 6 Key Reasons why the Property Boom will probably end before the middle of 2022. Property owners who are considering selling in the next 6 – 12 months will likely sell at the top of the market for the following reasons:

# 1. Government stimulus being turned off

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.

# 2. Property listings slowly increasing

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.

# 3. Pace of growth unsustainable and undesirable

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.

# 4. First-Home Buyer activity likely to decline

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 is likely to subside within the next 6 – 12 months.

# 5. Record low interest rates are starting to rise

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.

In recent months, international bond markets have started to move against government central bank 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.

# 6. Australia’s household debt problem is not going away

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.

Housing Prices
Housing Loan

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:

  1. Investor credit growth has started to rise
  2. Interest only loans have started to rise
  3. The share of high loan to value ratios has started to rise
  4. The share of very high loan-to-income lending has started to rise – of more than 6 x income
  5. The share of very high debt to income lending has started to rise

The RBA, APRA and Australian Government will be keeping a close eye on a range of key indicators over coming months.  These include:

  • Emerging household debt issues – for example, household energy bill debt increased significantly throughout 2020. Further deterioration will be cause for alarm.
  • Australian Consumer Confidence – consumer sentiment has been on a roller-coaster ride over the past 12 months,  The sugar hit from government stimulus helped drive a strong rebound in confidence and consumer spending from September 2020 to April 2021.  However, there was a decline in consumer confidence in May and June 2021. Digging deeper, the RBA March 2021 Report on the Australian Economy & Financial Markets shows fragile consumer sentiment.  Household consumption declined significantly in 2020 and many households are choosing to save rather than spend.
Household Income
  • Credit growth by sector – Australian households are doing most of the heavy lifting at the moment, borrowing to fund investment in housing. By contrast, business credit growth is weak reflecting the damage caused to many businesses by COVID-19.
Credit Growth By Sector
  • Business investment – there has been very little growth in business investment over the past 12 months. Business investment as a percentage of GDP is at its lowest level in 30 years.
Business Investment

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 party might go on for some time longer.