In the years since the 1990s recession, Australians have become accustomed to rising housing prices, with millions of people building entire investment plans and retirement strategies around the nation’s property market.
But now, as Australia takes its first tentative steps into the post-pandemic world, property prices are rising at a far more rapid rate than what we would consider a garden variety boom.
In fact in March, housing prices at a national level rose at the fastest pace in over 32 years.
Not since a time when Bob Hawke was Prime Minister and Australians were enthusiastically dancing along to Kylie Minogue’s number one hit ‘Locomotion’, was the property market this hot across the nation.
Quite the surprising turnaround for a market expected to suffer significantly from practically non-existent demand from foreign investors, temporary visa holders and new migrants.
It’s no secret that low interest rates spur on activity in the housing market, but the levels of growth in housing finance commitments are completely unparalleled.
In the past 12 months annual credit growth has risen by unprecedented 55.3 per cent, eclipsing the previous all-time high of 37.8 per cent recorded during the first homebuyer frenzy, driven by the Rudd government grants.
So far a major driving force in this boom has been first home buyers, in much the same way as they were during the global financial crisis.
Between March last year and its recent peak in January, the number of first home buyers getting into the market rose by a whopping 68.6 per cent, to a near record level of activity.
With such a huge increase in both the number of first home buyers and the overall amount of credit flowing into the property market, it’s clear why housing prices are once again doing the Locomotion toward dizzying new heights.
Both the above graphs show a recipe for a potentially unprecedented boom in the short term, but in the longer term they show what happens when the rocket fuel begins to run out.
While it’s still far too early to tell definitively, there are signs that the number of first homebuyers actively looking at getting into the market may be at or near its peak.
With prices rocketing higher at such a great rate of knots, many first home buyers are suddenly finding that their deposit or borrowing power is suddenly no longer large enough for them to be competitive in this market.
As a result many are rethinking buying a home, with some choosing to stop looking, at least for the time being.
Under more normal circumstances this could put a significant dent in demand for property in time, just as it did when first homebuyer momentum ran out in 2010 and 2011.
But with such low interest rates, a perceived lack of safe alternatives and current activity levels significantly below their peaks, there may be yet another source of fuel for the current property boom.
What does it mean for property investors?
Currently property investor activity in the market is 22.8 per cent below the peak recorded in April 2015.
When looking at a graph of housing loan commitments and seeing how owner occupier activity has taken off, it’s not hard to imagine investor activity rapidly heading for its previous peak.
Like a two-stage rocket, its possible owner occupiers and investors may combine to prolong the current boom.
First home buyers and owner occupiers have provided the fuel to create the conditions for rapidly rising prices. But just like a rocket launch eventually that first stage will run out of gas, in this case as first home buyers are priced out of the market.
Then as it becomes clear prices are rising and that there may be large capital growth to be had, the second stage of our rocket, property investors may choose to come back into the market in large numbers.
As the market continues to boom, it’s clear that demand from first home buyers and even some owner occupiers will fade, as prices get out of their reach and they give up on looking.
Whether or not investor activity will rise sufficiently to make up for this inevitable loss of demand in the longer term remains a matter of debate.
But in the short term with the growth in housing finance commitments currently heading ever higher, it’s likely that we will continue to see strong housing price growth in the months ahead.
Tarric Brooker
