With newly released evidence of slowing house price inflation in early 2022, it could be that Australia’s latest wealth boom is waning.
This is highly likely, especially with higher interest rates expected within months. But any plateau or slight decline will start with asset values dramatically higher than before the pandemic.
By the end of 2021 the typical Australian home was 30 percent more expensive than at the beginning of 2019. This would have clearly increased the hurdles faced by first home buyers, especially in terms of mortgage downpayment. After all, wages increased by only 6 percent in this period.
Far from triggering a property market crash, as was widely expected, the 2020 Covid-19 slowdown has triggered a phenomenal residential price hike. And, as our new international comparative research points out, Australia is far from alone in this. Similar Covid-19 house price increases have been even higher in New Zealand and the United States.
In fact, during the pandemic to date, nominal house prices increased in all eight case study countries included in our research – Australia, Canada, Germany, Ireland, New Zealand, Spain, the UK and the US. In contrast to the 2008 global financial crisis, neither of these countries saw a significant event of a slight decline in prices in 2020 or 2021.
What “saved” the market?
Surviving a pandemic-triggered housing market downturn can largely be attributed to notable government measures to maintain income and shield economies – widely implemented in Australia and internationally during the first two years of COVID-19. was done.
Extraordinary actions that directly protected housing systems and sought to protect at-risk populations helped allay initial fears of crashing property values and homelessness. Such activities – as seen in most of the countries covered in our research – include deferment of mortgage payments, rental eviction restrictions and emergency housing for the homeless.
What driven prices?
While such measures put a floor below the market in effect in 2020, other factors have combined to touch off the price jump widely seen in 2021. Key to this are rock-bottom interest rates and quantitative easing measures that have formed important elements of the central bank’s response to the worldwide crisis. While considered necessary to protect economic activity, they have also brought a huge amount of liquidity to the demand for housing.
In Australia and the UK, an additional factor was direct government-funded housing market incentives – generous home purchase grants and stamp duty concessions introduced in 2020. In hindsight, these are a false form of the official pandemic response, as they only compound the overheating of the market.
In some countries, stagnant household savings also contributed to the jump in prices. From unusually low spending and housing assets to cash-in, the pandemic has prompted many working-from-home families to spend big on improving their housing conditions. At the same time, many others have paid the price as a result.
Spiking Rental Market
For low-income households, the pandemic-triggered housing cost pressures have intensified more significantly through the increase in rent inflation seen in Australia and many other countries during 2021. Whereas some countries in our research had restricted fare hikes in the initial days. Income shock” phase of the pandemic, almost all of these limits were lifted when rents began to rise due to a change in demand.
By the end of 2021, with the possible exception of Canada, national annual rent growth in all Anglosphere countries was above 8 percent – a rate of increase generally far higher than the norm for the previous decade. Since the 2008 global financial crisis, rent inflation in Australia, the UK and the US has been operating at rates unseen by this time.
Equally, variations within the country have been observed in the effects of the pandemic rental market. In Australia, for example, demand for Sydney and Melbourne rentals in many interior areas, as a result of the absence of foreign students and foreign tourists, was greatly impacted by international border closures during 2020 and 2021. By the end of 2021, capital city fares across Australia had barely recovered from their pre-pandemic prices. Rental prices in non-metropolitan Australia, by contrast, were on average 18 percent higher than at the start of the crisis.
Higher rates of property price and rent inflation affecting non-metropolitan locations and homes (as opposed to apartments) have also been seen in other countries during the pandemic. These trends probably also reflect the residential “race for space”, a trend driven by the rapid rise of working from home. This has placed an increased premium on property size and has also weakened spatial ties to city center office spaces, causing many (usually more privileged) employees to consider moving out of town. Consequently, pandemic-triggered damage to housing affordability in non-metropolitan settings attractive from this approach is likely to be all the more.
Different stories in Germany and Spain
Importantly, most previous accounts most directly describe the pandemic-era experience in Australia and other Anglophone countries. Market influence has been quite different in some other high-income countries. For example, in Germany’s home sales market, the relatively strong pre-2020 price growth continued at a similar pace during the crisis. Meanwhile, Spanish price growth remained subdued.
Germany’s rental market also appears to be relatively unaffected by the pandemic, with rent inflation generally remaining moderate throughout 2020 and 2021. Meanwhile, in Spain, rents continued to fall in modest terms.
The German experience here probably reflects the country’s unusually stable and resilient economic and housing system, a tradition of conservative mortgage lending, and a strong social safety net. For Spain, a major factor affecting the country’s economy and housing market during COVID-19 will be the continued heavy losses by the major tourism industry.
housing affordability effect
Although contrary to predictions in some major cases, the direct and indirect housing system effects of COVID-19 have been profound. The all-new housing market trend seen in 2020 and 2021 is unlikely to be sustained. But, as things stand two years after the pandemic was declared, the resulting rising home prices and rents have exacerbated housing affordability stress in many countries. Notably, in five of the six countries for which we obtained national data, the nominal rent exceeded wage increases during the two-year period to the end of 2021.
Coinciding with energy prices and tax increases in many countries, these developments will only exacerbate the cost of living crisis calling for action to mitigate these impacts – including increased rental housing regulation and investment, and social security. Including an increase in payment rates.