A KPMG study shows while house prices have risen much higher than they would have done were it not for Covid, the red-hot price growth in the housing market will slow over the next two years, as mortgage rates rise, and the fundamentals of the housing market begin to kick in.
These include lower population growth, a reversion back to equilibrium and higher mortgage lending rates which weigh on property prices.
However, notwithstanding this slowing property price growth, KPMG predicts that by the end of 2023 house prices are expected to be up to 12 percent higher - and units up to 13 percent higher - than they otherwise would have been if there had not been a global pandemic.
KPMG 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. In essence, the consultant’s model revealed how different property prices were from the estimated long-run equilibrium price, as suggested by supply and demand fundamentals.
The research concluded that house prices in most capital cities were due for a cyclical upswing at the start of 2020. This however was stymied by the uncertainty caused by the pandemic and consequent economic downturn, which saw a 3 percent fall in prices in the June 2020 quarter.
According to KPMG economist, Brendon Rynne, 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.
“It appears the short-term positive factors of lower mortgage interest rates have swamped the longer-term negative factors of lower population and price disequilibrium during this recent price spike,” he said.
“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 6 to 9 months, past the point to where they would have risen under a no-Covid scenario.”
Supply too plays a role. KPMG’s 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.
The consultant’s modelling marked differences in the prices in capital cities, over the four years from December 2019 to December 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 jump; the research found.
Last week, the Governor of the Reserve Bank of Australia 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 to Rynne 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, he added, there is a risk the nation’s portfolio of economic assets could become distorted, which will negatively impact living standards in the future.