2020 has been a devastating year for many households and small businesses. As Australia moves through its first recession in over 28 years, ABS payroll data suggests wages are down 4.3% between Australia’s 100th case of COVID-19 on March 14, and October 31st. In the same period, payroll jobs decreased by 3.0%.
Source: RBA, Corelogic
At the onset of the pandemic, the consensus seemed to be building that the national decline in property values could reach 10%, with worst-case scenarios suggesting prices could fall by as much as a third.
But between March and October, Australian home values have fallen just 1.7%. In fact, October marked a 0.4% increase in values, with the trend over November suggesting a further acceleration in growth.
Although housing values are once again rising, it’s important to highlight that Melbourne housing values remain around 5.4% below their recent high, and Sydney housing values are still 4.8% below their 2017 peak. Values in Perth and Darwin are more than 20% below their 2014 peaks, while the remaining capital cities have seen housing values move to new record highs through the COVID period.
As Australia enters the start of a gradual recovery from the largest economic downturn since the 1930’s, how can this be reconciled with such a mild downturn in property values? A few factors that may explain the relative stability in housing, at a high level, are put forward below.
The cost of borrowing money is probably one of the most important factors influencing property values. Over 2020, the RBA has reduced the official cash rate target (which influences lending rates) by 65 basis points, to 0.1%.
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% increase in property values over the following two years.
Source: RBA, Corelogic
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.
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