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Writer's pictureGM Homes

The Perfect Storm

Australia’s potential property buyers are facing a “perfect storm” of economic factors that are driving prices up at the fastest rate in almost two decades. Yesterday property research firm CoreLogic revealed that in just one month home values surged 2.1 per cent – the highest single-month increase since 2003. Sellers are being swamped with offers, banks are welcoming new customers through the doors and interest rates are at historic lows.

Steve Mickenbecker, Canstar Group’s executive of financial services, said demand for properties is reaching fever pitch.”It is the perfect storm for house prices. On the supply side, new listings through 2020 were well below the four preceding years and total listings now are also down as stock is absorbed before or as soon as properties hit the market,” Mr Mickenbecker said.”Owners are loath to put a house on the market even at high current prices, fearing they will miss the boat getting back in.”

If historic low cash rates and restricted supply weren’t enough, there’s also a human psychological quirk jamming its foot on the price accelerator: FOMO, or the fear of missing out.”Property demand has run way ahead, with the fear of missing out becoming a powerful psychological driver as government incentives and low interest rates have encouraged first home buyers and home builders into the market in a rush,” Mr Mickenbecker explains.If the growth of Aussie house prices continues at its current meteoric pace, we could see the Reserve Bank’s hand forced in lifting interest rates off their current level of 0.1 per cent.

“The Reserve Bank doesn’t expect to raise the cash rate for three years or more, but unless property prices can be slowed it will have to start looking for some way to apply the brakes,” Mr Mickenbecker said.”First home buyers and new construction are leading the charge for property buying rather than investors, so the Reserve Bank can’t enlist APRA to target investors with lending caps as it has done previously.”Graham Cooke, head of consumer research at Finder, predicts the current growth has legs: a panel of 40 experts and economists forecast the average property price to grow by 12 per cent on average over the next two years.

“With more than $120,000 set to be added to the value of the average Sydney home over the next two years, the brief period of ‘affordable’ prices appears to be ending,” Mr Cooke said.”ABS lists the median Aussie income at $49,805, so homeowners in the Harbour City will be earning 22 per cent more than the average income, just by living in their homes for two years.”Westpac economists Bill Evans and Matthew Hassan are even more bullish.They believe house prices will spike by a total of 20 per cent over 2021 and 2022.”We now expect dwelling prices to rise by 10 per cent nationally in 2021 with this pace continuing in 2022,” Mr Evans and Mr Hassan advised last week.”The upturn is being supported by record low interest rates; the confident expectation amongst borrowers that these rates will remain low for years to come; ample credit supply; and an improving economic backdrop, as the roll-out of vaccines promises to bring the pandemic to an end and drives a sustained lift in confidence.”

But all good things must come to an end, and Mr Mickenbecker believes “market forces” will eventually apply the brakes as renters moving into their first homes free up supply.”Market forces must eventually slow the pace of demand, but we are going to have to see an increase in property listings to get us to that point. Supply must come from investors who will be feeling the heat as first home buyers leave a further vacancy behind, but investors can walk away with a tidy capital gain and no pressing housing need,” Mr Mickenbecker said.”Buyers will be feeling a lot of pressure before this all plays out and the Reserve Bank will be looking for a circuit breaker.


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