The story of how property dodged a bullet
I remember in the early days of Covid, some economists were predicting property prices to be smashed.
I think it was even CBA who were talking about falls of 30-40%.
Well, that didn’t happen. Right now, prices are down about 5% in Sydney and Melbourne, and that’s as bad as it gets. Nationally, they’re down just 1.7%!
You’d have to think that’s a pretty impressive result, right? The biggest disruption to the market in 100 years, and all it costs you is a few percentage points of growth.
And look, I’ll be honest. I never thought we’d see prices fall 30% – not in a prolonged way. I thought we might see a bit of panic selling and prices dip pretty sharply in the short-term, but we didn’t even get that.
So how did we do it? With the benefit of hindsight, how did the property market make it through unscathed.
This is the questions that Eliza Owen at CoreLogic was asking herself the other day.
Basically, she reckons there’s three reasons.
The first is, not surprisingly, super-cheap money.
The cost of borrowing money is probably one of the most important factors influencing property values. Over 2020, the RBA have 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.
I think you probably have to add in money-printing at this stage here, but this is right. Nothing influences property prices like the price of money.
The second thing that saved us what a systematic program of mortgage deferrals, which stopped any forced sales going to market.
In the case of large-scale mortgage debt, ongoing arrears can lead to forced sales, which in turn fuel risks associated with higher supply in the housing market, lowers values, and higher rates of negative equity, where the borrower sells their property for less than what they owe the bank.
Mortgage repayment deferrals have acted as a temporary stopper on this vicious cycle. Those that did not want to sell amid economic uncertainty due to an inability to repay their mortgage, did not have to. This may have contributed to very low levels of stock throughout 2020, which only reduced further amid stage 2 restrictions from March. The low level of stock on market likely helped to insulate dwelling values during this time.
That chart on the number of listings is pretty telling. The market will end up having one of its quietest years on record.
The final reason Owen points to is the fact that this downturn was actually different. It wasn’t wide-spread. It was concentrated in certain sectors.
A third, important factor that may have insulated parts of the housing market is the specific nature of the economic downturn. Severe job loss across hospitality, tourism and the arts resulted from the purposeful slowdown of ‘social consumption’.
The chart above shows that those working in food and accommodation and arts and recreation, have seen devastating job loss through the pandemic. However, those working in this industry are less likely to have mortgage debt.
The decline of employment in these sectors likely contributed to severe pockets of rental income decline, but the investor servicing debt may be able to hold on to the asset while it is temporarily vacant.
So basically, most of the brunt of Covid’s economic impact were borne by renters, and the home-buying segment got through relatively unscathed.
Put it together, and you’ve got to pay credit where credit’s due. The government response, both on the monetary and fiscal side, helped the Australian economy get through this pretty well, and Australia’s property market rode along on the economy’s coat tails.
Good result, chaps. Good result.