Why is the housing market so strong
The first quarter of 2021 was one of the most remarkable on record, with house price growth running at all time highs.
As real estate agents, we are often asked, ‘How’s the market?’. That question has morphed into ‘Why is the market so strong?’. No one expected a crash in Q1 2021 but few expected the explosive growth that occurred.
The primary reason for the house price growth was and will continue to be ‘cheap and available’ credit. Mortgage rates have been declining for 10 years. The few interest rate rises in the last decade were quickly reversed by the RBA with rate cuts. The retail banks Standard Variable Rate 10 years ago in April 2011 was 7.79%. In March 2021, ANZ were offering a 3 year fixed rate at 2.04% on some owner occupier home loans. What a difference 10 years makes.
Whilst mortgage rates have been in an overwhelming downward trend, available credit and consumer confidence in applying for that credit ebbs and flows. The market downturn that saw property prices plunge in 2018 was caused by tight credit conditions. The retail banks were under siege from the Banking Royal Commission and scrambled to introduce prudent lending standards. Many of those prudent measures have now been removed or eased to allow ‘credit flow’.
Given the biggest market corrections and price rises over the past decade have been as a result of credit conditions and availability, it’s evident that credit is the Number 1 determinant of market conditions.
Without doubt, there are some unique secondary issues in 2021 that amplified the impact of the generous credit conditions. COVID-19 has been the catalyst for many baby boomers to rearrange their affairs. Some are moving from large homes to luxury apartments, others are leaving Sydney for the regions. Baby boomers, born between 1946 and 1964 are the wealthiest generation to have lived. By virtue of their numerical dominance in demographics, if you follow the trends of baby boomers, you follow the boom. Given the role demographics play in the market, the movement of baby boomers in the past 12 months cannot be underestimated.
Pursuit of yield – remarkably there is abundant cash swirling around the economy after COVID-19. For the first time in our lifetimes, you cannot get any sort of credible return by leaving cash in the bank. Therefore, many buyers are chasing yield/capital growth in the property market (and stock market) rather than having inflation eat the value of their cash away. Only time will tell whether buying property is the right investment strategy.
What is apparent though, is people feel confident enough to venture into markets and splash the cash that is swooshing around the economy. This sort of confidence was definitely absent during the beginning of COVID-19 back in March 2020.
Finally, buyers are chasing space. That suggests that housing is enjoying strong buyer demand as opposed to apartments. The city is clearly oversupplied in apartments and undersupplied for housing – hence the explosion in house prices when the primary and secondary market indicators converge.
If you know what will happen to the property market in the next quarter, send us an email, because we are keen to know.
