It’s staggering how quickly the real estate market has changed since early this year when the covid lockdowns were in place. We are now in November 2020 and market sentiment is as positive as ever.
The current market is characterised by a lack of properties for sale and an abundance of buyers. Many properties are now selling within one week of being listed for sale, and achieving prices that are 5-7 percent more than the same time last year. And rental vacancies are at historic low levels.
A few people have asked recently ‘What’s likely to happen to the property market in 2021?’ My feeling is the market will continue to show positive price growth as long as interest rates remain low and the Reserve Bank keeps providing liquidity to stimulate the financial markets. Banks hold the cards in terms of availability of credit; this is the main driver of the real estate cycle because most people get a mortgage when they purchase a property.
‘There is a very high level of liquidity in the Australian financial system and borrowing costs are at record lows. $81 billion of low-cost funding for authorised deposit-taking institutions (ADIs) has been advanced under the initial allowance of the Term Funding Facility. ADIs currently have access to a further $120 billion under this facility.
The Board is committed to do what it can to support jobs, incomes and businesses in Australia. Its actions, including last month’s decision to expand the Term Funding Facility, are keeping funding costs low and assisting with the supply of credit’.
(Statement by Philip Lowe, Reserve Bank Governor, 6 October 2020, rba.gov.au/media-releases/2020/mr-20-24.html)
Monetary policy is controlled by the Reserve Bank of Australia; generally to control interest rates, inflation, and employment. Put simply, the RBA has the ability to ‘print’ money out of thin air and provide additional ‘liquidity’ to retail banks who can then lend this money to businesses and individuals, who then go and spend it. One person’s expense is another person’s income; the people or businesses receiving that income then pay taxes in various forms and the cycle continues. Expansionary monetary policy inflates asset values, including real estate.
Fiscal policy is controlled by the federal government. The federal Budget was delivered 6 October 2020 by the Treasurer and outlined numerous measures to stimulate the economy out of recession (see budget.gov.au), including tax cuts and financial incentives for housing and construction.
Prior to the budget announcement, the Treasurer, Josh Freydenberg also indicated that responsible lending rules would be relaxed, meaning banks can make riskier loans if they choose. ‘A proposed change to the law announced by the Federal Government would see responsible lending obligations removed from the National Consumer Credit Act 2009. If passed by Parliament, the changes would come into effect in March 2021’ (canstar.com.au/home-loans/responsible-lending). Whether or not this amendment is made, the message is clear; banks are being encouraged to lend.
When the covid lockdowns were introduced earlier this year, some reports were predicting up to 30 percent drop in real estate prices. There were also doomsday predictions that an ‘economic cliff’ would occur in September when the mortgage holidays ended. I’m happy to report that neither of these predictions came true!
The number of property sales on the Gold Coast decreased by around half from February to June; during this five month period, real estate agents were not able to do open homes or public auctions. However, we were able to conduct individual inspections and received a consistent number of enquiries from genuine buyers during this time.
To say it’s been crazy for the last three months – August, September, October – would be an understatement!
Taking all of these factors into consideration, it feels like the wind is in the sails for property prices to continue upwards. Residential property investment has also become more attractive due to low returns from fixed interest and volatility in the share market; 5 percent rental return is better than 1 percent interest from the bank.
‘Dr Lowe said record low rates were locked in for “at least” another three years because the bank would not raise them until the actual, not forecast, target inflation was reached, and that further easing and rising asset prices could help boost jobs and economic growth’.
(afr.com/policy/economy/rba-green-lights-property-risk-taking-20201016-p565rj published 16/10/20).
Confirmation that interest rates will remain low has given people added confidence to obtain a mortgage and upgrade or purchase an investment property. Whatever happens over the next 3-6 months, I’m sure everyone will be watching the property market with interest.
21 October 2020