Here’s the truth: We are in the worst recession ever - but housing prices are at an all-time high.
Photo: Unsplash | Source: Medium
Here’s the scenario:
In a time of economic recession, we expect house prices to go down. Simply because personal income is a huge factor that affects home prices. When there’s more money to spend, people can afford higher rent and luxury items. But in a recession, income declines, loss of jobs, lesser money and people won’t be able to afford as much as before.
It’s all about income
So, why are home prices rising to all-time highs in 2020?
Note again: Personal income is one of the most important factors that drive housing prices.
During 2020, governments around the world have provided remarkable if not the biggest budget allotted - fiscal stimulus. Put simply, much of this fiscal stimulus has replaced the income of people who lost their job during the recession.
So, even though this recession is even more severe than the financial crisis, personal incomes have not been impacted in the same way.
Which is not bad at all. BUT this does not tell us why house prices are rising.
What really impacts the price of housing is the income of people who are in the market to buy a house.
Low-income earners have been hit hardest in 2020
Low-income workers have been hit hardest, but that would have little impact on the demand for houses because low-income earners can’t afford to buy houses; They rent.
It is the middle to high-income earners who buy houses, and their earnings were not as badly hit as the low-income earners. Combine that with the fiscal stimulus and all-time low-interest rates, those higher income earners that were lucky enough to keep their job have been bidding up the price of houses.
Consider the following facts.
Housing prices, the largest component of personal wealth, is at an all-time high.
The stock market is also at an all-time high.
Many high-income earners have been lucky enough to work from home and keep their jobs.
This allows them to invest more in housing and the stock market.
The lowest income earners have been hit the hardest.
Low-income earners are also much less likely to own their home or have any money invested in the stock market. This means they have not benefited from the rebound in these asset prices.
This story is not unique to AU. We see the same thing playing out in Canada and other OECD countries; The types of jobs that have been lost during this recession have disproportionately hit those with the lowest-income and lowest ability to weather a job loss.
So why build in these times?
Because exiting homes are bringing super high prices and the clock is ticking on the cost of building new.
We have not seen great increases in the cost of building yet so you can get more bang for your dollar, a warranty from the builder and some great tax breaks if it is an investment, so don't delay as a new build will cost more later next year.