It has been a devastating year for many households and small businesses as Australia moves through its first recession in more than 28 years.
ABS payroll data suggests wages are down 4.3 per cent between Australia’s 100th case of Covid on 14 March 14, and 31 October and payroll jobs decreased 3.0 per cent.
At the onset of the pandemic, consensus seemed to be building that the national decline in property values could reach 10 per cent, with worst-case scenarios suggesting prices could fall by as much as a third.
But between March and October, Australian home values have fallen just 1.7 per cent and October marked a 0.4 per cent increase in values, with the trend over November suggesting a further acceleration in growth.
Although housing values are once again rising, it’s important to highlight that Melbourne housing values remain around 5.4 per cent below their recent high.
Sydney housing values are still 4.8 per cent below their 2017 peak and values in Perth and Darwin are more than 20 per cent below their 2014 peaks, while the remaining capital cities have seen housing values move to new record highs through the Covid period.
As Australia enters the start of a gradual recovery from the largest economic downturn since the 1930’s, how can this be reconciled with such a mild downturn in property values?
A few factors that may explain the relative stability in housing, at a high level, are put forward below.
Low-cost debt
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 per cent.
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 per cent increase in property values over the following two years.
