Is Housing Immune to a Slowdown in The Economy?

Earlier in 2019, a carry-over of the Royal Commission’s probe into lenders put pressure on lenders to be much more critical of the qualifying process. This in turn resulted in fewer loans. Coupled with a slow-down of Chinese investors along with an impending Federal Election, the stage was set for a rebound.

By June of last year, the pressure was off the banks. The Liberals maintained power (which ensured investors and retirees weren’t going to lose benefits), and interest rates became sharper as lenders started competing more aggressively for new customers. Banks also reduced the internal interest rates used to stress-test borrowers.

Amidst some quick house price gains late in 2019, January opened with a 0.7% increase in Melbourne and Sydney according to research from CoreLogic.

At the beginning of 2020, the market sentiment was strong with bank surveys showing people were becoming bullish when it comes to bricks and mortar. The Commonwealth Bank’s survey of home-buying intentions was said to be at a record high and Westpac’s survey was showing a 58% increase from 12 months earlier. It didn’t hurt that the RBA was reducing interest rates to record lows due to a sluggish economy.

All this despite a hit in consumer confidence from the bushfires, weak retail performance and slow wage growth.

And now as we slowly emerge from a global pandemic and assess the economic damage both locally and around the world caused by lockdown, it’s property and construction that hold fundamental hope for the future.

On the one hand you have the Reserve Bank of Australia hovering just above 0% interest rates – in and of itself a great motivator for borrowers. Homeowners and renovators have been demonstrating the biggest appetite for new loans. With the Federal Government looking to provide a multi-faceted stimulus to the construction and building industries, investors are also now looking for opportunities (many investors had pulled back due to uncertainty around rental income and a shortage of investment property options due to retracted listings).

With a reduced number of listings and based on the current trend of search activity, sellers are inclined to increase their prices. As prices begin to increase, more sellers will be motivated to list their properties. As more properties come on the market, price increases (in theory) taper out. However, there is a phenomenon called FOMO (fear of missing out) which can also act to drive growth (in popular suburbs, usually in big cities).

First homeowners are being incentivised at the moment however with the size of the average Australian home loan growing (circa $500,000 as at December last year according to the ABS), it will be interesting to see if the current levels of incentives can sustain new entries to the property market.