While life pre-pandemic may seem like an eternity ago, we thought we’d cast our minds back to earlier this year, when COVID-19 first hit. As pandemic-induced chaos set in, the US, Europe, China and India were experiencing their sharpest decline in economic growth since World War II. Ominous headlines the world over were predicting that COVID-19 would have a catastrophic impact on the property market: with reduced economic activity, a shift to online shopping and working from home, and an inability to pay rent, there was less need for physical real estate.
The situation in Australia was anticipated to become pretty dire. Major economists were forecasting a drop in national house prices of around 10-20 percent across the year, and a worst case scenario of 32 percent by the end of 2022. CoreLogic stated that consumer confidence was damaged more by the pandemic than it was by the GFC, largely due to the uncertainty of a health crisis.
However, our senior economist, Dr Kevin Hoang, saw the narrative going in a different direction: in March, he informed us that the scale of market decline wouldn’t be as grave as predicted. In fact, Kevin anticipated the market would remain relatively stable thanks to historical trends in Australian property prices and the value of the property market to the Australian economy.
Kevin’s forecasts from March to September 2020 vs ABS data from 2015 to 2020.
“I have been deeply studying the Australian property market over the last few decades, and despite peaks and troughs, it generally goes up,” says Kevin, who has a PhD in Economics/Econometrics/Statistics from the University of New South Wales. “The government and the banks cannot afford to see the market collapse, which not only could trigger a more severe economic crisis, but also negatively impact government revenue and the banks’ balance sheets.
“The value of the property market, building activities and other property-related services are very significant to the economy. Therefore, the property market is a key drawcard of government policies. When the market was weakening, the government introduced a suite of generous incentives such as building and renovation grants, and the stamp duty exemption for first-home buyers.
“Looking at the long-term, Australia’s population is growing fast at around 1.7 percent per year, which is three times higher than the OECD’s average growth rate. Therefore, the demand for real estate, both residential and commercial, remains there.”
Kevin’s advice empowered us to continue purchasing property on behalf of our clients, both at the start of and throughout the pandemic. Fortunately, current figures reveal that the market has remained fairly resilient. Between March and October, home values fell only 1.7% nationally according to CoreLogic, with October actually experiencing a 0.4% increase in values and November showing further growth. Despite Sydney, Melbourne, Perth and Darwin not faring as well as other markets around Australia, the situation seems promising on the whole – especially in regional areas. Kevin mentions that buyers are looking for more space due to the fact that they’re conducting their work from home, so areas like Ballarat and the NSW Central Coast are performing very strongly.
It’s fair to say that buyer demand indicates positive market sentiment, too. While the data reflects increases across the nation, it’s actually a lot stronger than what the data suggests: properties in Sydney and Melbourne, for instance, are selling in excess of 10-15 percent of fair market value. This is also the case in Canberra and several other regional markets. In the new year, and once the data catches up, we expect to see the rebound from COVID being much stronger than first anticipated.
Kevin cites a number of reasons why the Australian property market has more or less managed to stay afloat: an ultra-low cash rate that will likely stick around for the foreseeable future; state and federal investment in fast-tracked large scale infrastructure, which will create plenty of jobs; and a quick recovery of domestic activity thanks to Australia’s success in curbing the spread of COVID-19.
Naturally, the headlines are starting to look profoundly different. Many experts have revised their predictions of 10-20 percent declines, and are now anticipating that property values will actually eclipse pre-COVID prices in early 2021, as long as growth trends continue and Australia can keep the virus under control. Kevin sees the long-term outlook as looking particularly bright.
“I am optimistic about the Australian property market,” he says. “Despite short-term volatility, Australian property values generally go up. If the property to be purchased is well selected, it will likely double in value in the next 10 years.”
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