Six ways COVID-19 has shaped the housing market

The global pandemic has catalyzed remarkable changes in Australia’s housing market. From the temporary closure of cities to an unprecedented monetary policy strategy, a newfound popularity of regional and low-density housing preferences, and the introduction of various government homebuying incentives, the COVID period has had distinct impacts on buyer composition and housing market dynamics.

Here, I explore six of the major impacts on the Australian housing market two years later.

1. Australian home values ​​rose 25% to record highs.

Despite an initial decline, home values ​​increased by 24.6% between the end of March 2020 and February 2022. Figure 1.0 shows the cumulative change in the national CoreLogic Home Value Index since the onset of COVID-19. The index experienced a relatively small decline at the onset of COVID-19, with sales and listings volumes being affected much more than prices. National home values ​​fell -2.1% between April 2020 and September 2020, before soaring amid low interest rates, high household savings, government subsidies and strong reduction in housing supply.

In February 2022, CoreLogic estimated the total value of residential real estate at $9.8 trillion, up from $7.2 trillion at the start of the pandemic. The median Australian home value rose by $173,805 to $728,034.

2. First-time homebuyer activity has peaked.

First-time buyers accounted for a significant portion of housing demand at the start of the pandemic. This cohort benefited from more affordable housing options following the previous downturn, as well as record mortgage rates and government incentives.

ABS data shows that the number of new loans to first-time buyers increased during the housing market downturn from 2017 to 2019 (Figure 2.0). From June 2020, first home buying activity surged as part of the introduction of the HomeBuilder Scheme, used alongside the First Home Loan Deposit Scheme, along with other government grants and entitlements of stamp for the first buyers.

Figure 2.0

The result was a spike in first-time homebuyer activity, which peaked in January 2021. The spike reflects first-time homebuyer participation in 2009-2010, which marked a temporary boost to the first-time homebuyer subsidy. owner. Since peaking in January 2021, first-time home buyer activity has declined, reflecting higher barriers to entry, as home values ​​far exceed incomes.

In January 2022, first-time homebuyer loans numbered 10,964, above the decade average of 8,682. Proportionally, first-time homebuyer loans accounted for 24% of homeowner mortgage demand in January, which is in line with the average for the decade.

This may have implications for homeownership rates, which could see an increase in 2016 ABS Census figures. While rising home values ​​have created a bigger deposit hurdle for those looking to enter in the market, various government programs introduced throughout 2020 have helped entice first-time buyers to participate.

3. Rents rose 11.8% to record highs, while gross yields fell to record lows.

The CoreLogic Rent Value Index, which tracks changes in rental values ​​over time, also hit new highs.

Figure 3.0 shows the evolution of the National Rent Index since the end of March 2020. While rents saw a slight decline of -0.8% between March and August 2020, there was a rapid recovery in these values, followed by a push to 2021.

There are several reasons why rents have gone up. Investor activity had been relatively subdued between 2017 and mid-2020, contributing to rental supply constraints. Rental supply may also have been eroded by the rise of rental services like Airbnb, which allowed landlords to look to the short-term rental market. This latter trend may have been particularly prevalent in tourist destinations across Australia, some of which have thrived amid a rise in domestic tourism over the past couple of years. For investors who have recently purchased long-term rental housing, rents may have increased due to higher purchase prices.

Figure 3.0

During 2021, the annual growth in rent values ​​reached its highest level since 2008. Across Australia, median advertised rents since March 2020 increased by $30 per week to $470 per week. The big numbers hide the diversity of rental conditions. Throughout the pandemic, there has been a clear shift in rental preferences towards lower density housing options, where the upward pressure on rents has been greater. This trend has evolved over the past year, with rent affordability gradually shifting demand towards higher density rental options where the rental cost is more affordable.

However, gross rental yields have fallen. Indeed, gross rental yields represent part of the purchase price of a property and the purchase prices of properties have increased by 24.6% since March 2020, exceeding the 11.8% increase in rents. Nationally, gross rental yields fell from 3.8% in March 2020 to a record high of 3.21% in February 2022. As housing growth began to slow, this gross rental yield figure record seems to have started to stabilize.

4. Housing debt levels have reached record highs.

The rapid increases in housing values ​​and rents over the past two years have largely been the result of a significant reduction in the official exchange rate. With the RBA setting the official cash rate target at 0.1% since November 2020, the lower cost of debt has allowed borrowers to access more credit.

In January, total housing credit outstanding hit a record high of more than $2 trillion, according to the RBA, while the housing debt-to-household income ratio was at an all-time high of 140.5% through the third quarter of 2021 (Figure 4.0). This figure is up from 139.2% in March 2020.

Figure 4.0

As total credit outstanding reached more than $2 trillion in January, ABS data shows monthly new financing borrowed for the purchase of goods continued to hit new records through January 2022, at $33.7 billion.

High levels of housing debt, especially when they have grown faster than incomes, are creating vulnerability in the Australian economy. However, it is important to frame debt levels in the context of high asset values ​​and relatively low interest charges. RBA data shows real estate interest payments on income have fallen to their lowest levels since 1999, and household debt has fallen as a share of house values.

5. The house price premium over units has reached record highs.

The composition of the buyer pool and the impacts of COVID may have contributed to a record gap between home and unit values. Investors, who may have a preference for shares, have represented a relatively small share of demand throughout the rally. Additionally, detached homes may have been in higher demand as Australians spent more time in their homes during the pandemic. Government policies such as the HomeBuilder subsidy may also have contributed to the increase in demand for individual housing, due to tight construction deadlines to qualify.

The result is a record gap between house and dwelling values. Figure 5.0 shows that the median home value across Australia was at a record 29.8% above the median Australian unit value, with a dollar value premium of around $182,000. That’s up from just 8.5% in March 2020, or a dollar premium of about $44,000 for homes.

Figure 5.0

Figure 6.0 shows the dollar premium of median home values ​​over median unit values ​​in each of the capitals, with most cities seeing a substantial increase in this value since March 2020.

Figure 6.0

6. The rise of the regions.

Migration trends in 2020 and 2021 revealed an increase in the number of people leaving the cities for the regions outside of confinement periods, and a decrease in the number of people leaving the regions for the cities.

The result has been above normal housing demand against unusually low levels of listings across regional Australia in both the sales and rental market. Value gains on Australia’s regional home values ​​have been nearly 40% since March 2020, while capital home values ​​are up around 21% (Figure 7.0).

Figure 7.0

In lifestyle regions, which have become extremely popular over the past two years, new million dollar markets have been created in areas such as the Sunshine Coast, Illawarra and Gold Coast, where the median home value is now over $1 million.

Where to go from here?

The current housing market recovery has generated extraordinary gains in value, offering a significant increase in wealth for homeowners, but greater barriers to market entry for non-homeowners. But since April 2021, monthly gains in national home values ​​have eased. Arguably there are more headwinds than tailwinds against the continued growth of the housing market, with the potential for earlier than expected cash rate increases, affordability constraints and weakening sentiment. consumers slowing down demand. Although some structural changes related to the pandemic, such as remote working, may support demand in the Australian region in the long term, it is likely that housing values ​​will start to fall quite broadly later this year.

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