Surely they should be declining?
To answer this question KPMG Economics expanded its previous house price modelling for Sydney and Melbourne to all capital cities and for both houses and units and then looked at what has actually happened over the past 18 months and compared it to a scenario of ‘what would have happened if COVID-19 had not occurred.’
The analysis was based on macroeconomic forecasts it prepared just before the pandemic struck (ie: the no-COVID scenario) and its most recent forecasts (ie: the COVID scenario).
What the analysis shows is that by the end of 2023 house prices are expected to be between 4-12 percent higher and units up to 13 percent higher than they otherwise would have been, if (a) there has not been a global pandemic and (b) various policy responses hadn’t been necessary to implement, such as pushing the cash rate down to 0.1 percent, introducing the HomeBuilder program or starting Quantitative Easing.
So why the difference? The ultra-low interest rates that the RBA has maintained during this period, allied to the government support to the housing market, has outweighed the longer-term negatives associated with the housing market such as lack of migration and slower population growth.
There will, however, be an end to it. The currently red-hot price growth is expected to temper over the next two years, as mortgage rates rise and the fundamentals of the housing market begin to reassert themselves.
Pre-COVID, going into 2020, property prices in Australia capital cities were due for a cyclical upswing. Initially at least, this was stymied by the uncertainty caused by the pandemic and consequent economic downturn, which saw a three percent fall in prices in the June 2020 quarter.
But once market participants became confident that the pandemic would not result in a free-fall of home values, a combination of monetary and fiscal policies quickly began to push things the other way.
The material decline in mortgage interest rates; extra savings from not spending on holidays and leisure; and generous income support from government and housing market support specifically, has seen property prices rise dramatically in the past six to nine months, past the point to where they would have risen under a no-COVID scenario.
Supply too plays a role. Our analysis of dwelling approvals in the big cities shows that in Melbourne and Sydney there are likely to be 25,000 and 20,000 respectively fewer houses and units available than would have been the case in a no-COVID scenario.
In KPMG’s analysis, the differences in the prices in capital cities, over the four years Dec 2019-Dec 2023 in COVID and no-COVID scenarios are led by Sydney with a predicted 25 percent rise now, compared with what would have been a 13 percent rise. Brisbane is next with a 19 percent rise compared with a no-COVID 8 percent increase.
There are certainly issues here that the RBA in particular, needs to consider. Last week, the Governor trimmed back a little on the bond-buying program but essentially kept up the extremely dovish monetary policy settings.
These clearly played a key role in staving off recession early in the pandemic, but the domestic economy has rebounded strongly, with unemployment returning to pre-COVID levels, and asset price inflation is still accelerating. So the challenge now is how to steer the economy through this stabilising period without it becoming unbalanced.
Of increasing concern is the balance between investment activity in the residential property sector and investment activity in the business assets that will potentially stimulate productivity and generate higher returns in the future.
If this continues there is a risk the nation’s portfolio of economic assets could become distorted, which will negatively impact living standards in the future.
Dr Brendan Rynne is Chief Economist, KPMG Australia.
