Housing demand — Australia
The corona pandemic has hit us all very badly in 2020. We have seen large scale job losses and business closures. The world economy has been on a downward trend and Australia is no exception. Despite all the negative sentiments, house prices have been increasing at an unprecedented rate during 2020–21. There is no indication of it slowing down. Many of us have been wondering the reason behind this unusual market behaviour.
Leaders of the first world, including Australia, have demanded an investigation on the reasons and spread of the pandemic. This has resulted in new trade war between China and countries (incl Australia) demanding the investigation.
Australia being a net exporter to China and has been adversely affected. China has targeted imports from Australia ie. minerals, barley and wine. In addition, the closure of Australian borders, have adversely affected the Education and Tourism sectors.
So, on the whole, Australian economy is not doing very well. (However, the government has offered various financial packages to support businesses)
Many of us, including me, have wondered as to the factors responsible for the increase in housing demand and property value.
My write up will hopefully explain the unusual behaviour.
Facts
I will be discussing my argument using three sets of information.
1. Migration
2. House sale prices and numbers, and
3. Population growth vs supply.
Australian migration (abs.gov.au)
Australian migration have increased post 2004 and on an average we have had more than 200,000 people migrating to Australia.
Over half (54%) of the permanent migrants were living in their own homes.
Housing number and prices (rba.gov.au)
More than half a million houses change ownership annually, which accounts for about 6% of the total stock. Median house prices have increased from $196,000 in 1996 to $825,000 in 2020. It is an increase of more than 500%.(REIA data)
Population growth
Population growth have overtaken the supply of houses, thus creating a demand supply gap. However, in the recent years the gap between demand and supply has reduced.
Grattan institute illustration below.
As per Grattan Institute article in 2018, on an average a family takes 10 years to save their 20% deposit for the house. During the 1990s, buyers could save the same in 5 years. The growing house prices have made the situation worse for the buyers. The fall in interest rates over the years have definately contributed to the house price increase.
Analysis
Buying a home is a lengthy process. Saving a deposit for your home takes more than 5 years (double earning households) with a target date. For example, if I want to buy a house in 2025, I will start saving money in 2019 based on income and target price. It is a continuous process.
So all those people who had targeted to enter the property market in 2020, were not able to do so. We were in a lockdown and hence no (or very few) properties changed hands. No new constructions commenced either. People were just waiting for the situation to improve.
Come 2021, when the markets opened and situation started getting normal, all those who were waiting to buy in 2020 got active. They were joined by those who had planned for 2021. There was one full years backlog competing with current year demand. In other words demand soared as compared to supply.
Zero activity in 2020 have given rise to an artificial demand in 2021. And we know what happens when demand goes up.
We have seen people pay 10–15% more than they would have paid in 2019, for the same property. People are desperately trying to enter the market.
I will give you an example, in my area in Berwick, the houses that sold for $630K — $650K in 2019 is now valued in upwards of $750K — $770K. It is an increase of 15–20%. There is this piece of land that couldn’t be sold for $850K — $900K in 2019 sold for $1.1 million last month.
What is the future?
As the demand have increased, the fear of being left out, has forced people to compete and pay a higher price (price elasticity of demand).
Capacity to pay is limited. Buyers will stretch their capacity to the extent that is sustainable. If it gets out of their limits, they just drop out and wait for the right time to enter market, or change expectations. Some of the people do overstretch and get into trouble. (By overstretch, I mean they exceed their capacity for repayment and cannot be sustained).
I don’t have the current sales figures but assuming that a percentage of customer who missed out in 2020, has been able to fulfil their dreams in 2021, but a large portion is still left out. On top of the backlog, we have new buyers entering the market in 2021.
My opinion — the increased demand is going to continue for the rest of 2021 and next year. Then it will plateau out eventually. With the vaccine being rolled out, we are most likely see the economic situation improving. The housing market will be under extra pressure for some time now.
source:
https://www.abs.gov.au/statistics/people/population/migration-australia/latest-release
https://www.abs.gov.au/articles/over-half-permanent-migrants-are-homeowners
