The boom next year hinges on this one thing:
So it seems like we’re all agreed now. 2021 is going to be big.
CBA, ANZ, Westpac are all looking for price growth of between 10 and 20% over the next year or so.
(I don’t know what NAB are on the record as predicting, but it’s probably something pretty similar.)
A lot of people are going to find this puzzling. What happened to the worst economic downturn since the Great Depression? What happened to the Covid Crash? What happened to the devastation of lockdown?
(Over to you Adelaide.)
The short answer is money. Money happened.
The government carpet-bombed the economy with money.
And, if truth be told, maybe more money than they needed to, with the benefit of hindsight.
And how is that going to cause a boom in property prices?
Well, part of the story is interest rates.
When you include the pivot to fixed rates, interest rates are about half of what they were pre-covid.
And more than anything else, it’s interest rates that drive property prices.
So that’s creating a massive tail-wind for property prices.
But there’s another factor.
Remember, to buy a property you need serviceability, which swings on interest rates, and you need a deposit.
And what’s happening to deposits?
Wow. Is it even real?
This is from CBA’s internal data. It is based on the average total savings balance per household, including home lending related savings and transaction or savings accounts.
It has surged over the past six months, to be 15% higher than this time last year. And CBA reckon it’s still growing.
So there’s been a phenomenal surge in savings. And that means there’s an ‘extraordinary’ amount of savings just sitting in the barrel:
The sums are simply extraordinary. On our calculations it looks like when we start 2021 the Australian household sector is likely to have around $A100bn (5% of GDP) in additional savings that have been accrued since COVID-19 arrived in Australia.
5% of GDP is phenomenal. It’s massive.
And as I said, it’s all thanks to government money. Financial support to households was massive, at the same time as wages and salary income held up much better than expected:
Thanks to government money, household incomes are now growing at a thumping 7% a year.
And that’s enabled many households to just tuck that money away in their savings accounts.
But think about what they means.
Because what is a deposit? It’s money that you’ve saved.
And so if we’re saying there’s been a phenomenal surge in savings, it’s another way of saying that there’s been a phenomenal surge in deposit power.
And when the dust settles and the new year opens up, households will find that they’re sitting on huge reserves of capital, that they’re ready to deploy.
Many households will funnel it into consumption, but many will funnel it into productive assets.
And if you’re sitting on a deposit, with the cheapest interest rates in the world, you’d be kind of mad to not buy property, in my opinion.
(The right, investment-appropriate property, obviously.)
But this is what the boom in 2021 swings on. A massive increase in serviceability power, and a massive increase in deposit power.
It’s pretty much baked in.