Around April last year I put out a video explaining my thoughts on the impact of COVID on the Australian property market. At that time, there were a lot of risks and a lot of unknowns.
Unemployment was increasing, people were putting mortgages on hold, everyone was in panic mode and things looked pretty dire.
Nine months on, we have kicked off a new year and things are different.
We have now wrapped our heads around many of the COVID related issues and have largely adapted our lifestyle to cope with the virus. There is also a vaccine being rolled out across the world which gives us hope that one day we may be able to return to a COVID free world. This may take longer than many people anticipate, but there is hope for a good reason.
So how are things shaping up for the Australian property market in 2021?
Well, the property market is already off to a good start from the second half of last year. House prices did drop by 2.1% between April and September 2020 but, as you can see from the graph below, every capital city with the exception of Melbourne had a positive return for the year. That’s a very good outcome considering what we were facing!
Source: CoreLogic, Hedonic Home Value Index from December 2020
Some of this rebound in property prices can be attributed to the government stimulus pumped into the residential property sector. This included the HomeBuilder grant by the federal government (which is set to end 31 March 2021) and various other state specific incentives.
In 2021 we are not likely to have this level of government stimulus to help push property prices up so does that mean prices will fall? Well, probably not.
Provided unemployment continues to remain low and there are no new left field events which we aren’t anticipating (it’s always the things that we don’t see coming which hit us the hardest), I am actually quite bullish on property prices in 2021. Let me explain why.
Interest rates are the lowest they have ever been and there appears to be no intention to raise rates any time soon. With the cost of borrowing so low, the amount of debt people can service is higher and this is going to increase the demand for property.
In this market it is hard to justify renting. You see, when you buy a property using a mortgage I look at it as though you are renting off the bank. For example, if you have a $500,000 mortgage with an interest rate of 3.0%, your cost of borrowing (or your rent to the bank) is roughly $288 per week. I calculated this as follows:
Weekly interest = $500,000 x 3%
Now I don’t know about where you live but here in Perth you would be renting a shoe box in the middle of nowhere for $288 per week but if you spent $500,000 on a house then you could get something fairly decent. This will entice people to buy and the more people who want to buy houses, the higher property prices will go.
There are obviously a lot of factors, other than interest rates, that dictate property prices but for me, rates are the primary positive driver at the moment. However, it is always prudent to consider some of the risks to property prices. Here are the main risks that I see:
- Rising interest rates. An increase in interest rates would obviously put the squeeze on affordability of housing and push more people out of the market (a drop in demand).
Personally, I can’t see rates rising until we start to get inflation, which the government is desperately trying for with no success. If we do get high levels of inflation, the Reserve Bank will raise interest rates to cool things off and bring inflation down again.
- A rising Australian dollar. This would mean less foreign investment which would push down demand for property.
- A new strain of COVID. Although we have a vaccine being rolled out for COVID, there is a very real chance that a new strain can emerge that isn’t covered by the vaccine. This is bad for the economy and property prices for obvious reasons.
- Less migration to Australia. With our borders closed, it is likely there will be less migration into Australia. Migration helps to increase the demand for property.
- From an investment perspective, there is additional landlord risk due to COVID. Government policies were implemented to protect tenants when unemployment was high due to COVID by restricting evictions and rent increases. Although these were temporary measure, it does present a real risk to landlords.
- The unknown. It is always the unknown factors that can hurt the most!
So obviously there are some risks to consider but, based on the information we have today, I think it will be fairly smooth sailing for property in 2021. Does this mean you should rush out and buy property ASAP? No!
I believe that, for most people, a good financial plan will involve a property purchase and it should be your financial plan that drives the purchase not speculation on prices.
Even if property prices were guaranteed to rise in 2021, that doesn’t mean you’re ready to buy. You first of all need your deposit, have a stable income and understand how a property purchase fits into your overall wealth strategy. Overleveraging yourself can ruin your financial position even in a rising market.