2020 will be a year to remember. For the first time in 29 years, Australia slipped into a recession as its economy suffered the furious onslaught of Covid-19 and impact of massive bushfires, combined. Nearly 1 million people lost their jobs and the economy shrank by 7%, ending an extraordinary, uninterrupted economic growth run of almost 3 decades.
Yet, in just one year, the economy bounced back contrary to all expectations and experienced a surprising V-shaped recovery with GDP levels higher than before the pandemic. Stringent lockdown measures successfully kept the curve of Covid infections impressively low, accompanied by significant income support and fiscal stimulus.
Australia is one of the few developed countries with GDP back above pre-pandemic levels in a short time and also one of the few countries in the world with low Covid cases relative to the rest of the world.
The Lucky Country
To further grow the economy and drive it into full employment, Australia’s 2021-22 budget provides more stimulus, supported by high iron ore prices, instead of focusing on austerity measures. According to AMP Capital, this makes sense as reverting to austerity would delay the return to full employment and decent wages growth.
In a sign of optimism, the IMF in April 2021 upgraded its forecast of the Australian economy to 4.5% this year and 2.8% in 2022, slightly more optimistic than the Australian Government’s more conservative outlook of 4.24% and 2.5% in the same period. In the long term, the Australian government expects the economy to then grow at 2.6% per year over the next 40 years.
Population Impacted by Migration But Pre-Covid Levels Expected in 3-4 Years
For years, migration has been a large contributor to Australia’s impressive population growth, which is among the strongest in the developed world. In fact, Australia’s population growth is comparable to that of developing nations like Malaysia and the Philippines! But because of Covid-19 travel restrictions, net immigration has fallen and caused a slowdown in population growth. This is the first time that population growth in Australia has fallen in 100 years.
Australia’s annual population growth in the year ending 31 Dec 2020 slowed down only 0.5%, bringing the amount to 25.6 million people. Of this, only 2.4% was due to overseas net migration. Although overseas migration arrivals decreased by 60% in the year ending 31 Dec 2020 compared to 2019, overseas migration departures have also decreased by 33%.
Population growth in 2020-21 is forecasted to only 0.1% as a result of border closure. The hit to immigration is expected to result in negative net overseas migration until 2021-22 before lifting to pre-Covid levels over the next 4 years.
The Housing Market Response to Covid-19 & Immigration Challenges
Australia has had one of the world’s strictest lockdown measures, particularly in the state of Victoria, which endured the toughest closure of all states Down Under.
Immigration has fuelled the Australian population for years, and is a big driver of property price growth. The hit to immigration as a result of international border closure will reduce annual underlying demand for homes. The Australian government foresees a gradual recovery in population growth to normal over the next 4 years.
The early stage of the pandemic saw initial predictions of house price declines up to 30%, but that could not be further from expectation. Although prices did fall, they were mild with Melbourne experiencing the biggest drop resulting from prolonged lockdowns. As at December 2020, 80% of capital city suburbs started recording house price increases, while in some cities like Sydney, 95% of suburbs saw price jumps.
Clearly, a combination of suppression combined with government incentives, extremely low bank/ mortgage rates, excellent handling of pandemic transmission rates, on top of limited supply of houses for sale, have seen the property market respond with a surge in prices.
According to a news report published in February 2021, Australia is also facing a national housing undersupply to the tune of about 700,000 homes, underpinning the growth in house prices.
By March 2021, Australia recorded a nationwide house value surge of 2.1%—the largest increase since August 2003, with capital city price gains led by Sydney and Melbourne!
This was reflected in the increase in home loan and building approvals across the country, more for landed houses and less for apartments. More significantly, March 2021 signalled the return of property investors as the ABS recorded a strong increase in home loan approvals for investors.
Moreover, Westpac, which predicted in February 2021 a bold 20% house price increase over 2021 and 2022, revised its prediction in July, forecasting that a stronger than expected surge over the H1 of 2021 will see an 18% price growth in 2021 alone, and 5% in the H1 of 2022.
Lockdowns and Covid-19 disruptions will cause a loss in momentum in Q3 2021 especially in Sydney (with price stalls possible), which is undergoing prolonged closure at the time of writing. However, activity will rebound again swiftly and prices lift again into the year end once restrictions are eased.
The lender also predicts a policy intervention in 2022, triggered by a rise in housing credit, which will see a slowdown in price growth through 2023.
Hacking the Australian Property Market
Property investors, particularly those who have invested in fast-growth Australian regions in Melbourne and Sydney would have experienced strong capital growth over the past two decades, as continued population growth in these cities drive housing demand.
The property market has outperformed one year on after the pandemic first struck and contrary to all expectations, with some experts citing that Australian property prices have increased because of Covid, not in spite of it. While house prices are expected to surge through 2021, the price growth is expected to taper in the following year.
Border closure resulting from the pandemic will reset population numbers both in the immediate and long term, and revise the undersupply of housing that has propped property prices for years. Meanwhile, rental market conditions will be diverse depending on region and housing type, with many inner city rental values declining and vacancy rates increasing due to the drop in international student, tourists and overseas arrivals especially in the CBD areas of Melbourne and Sydney.
Interestingly, bank economists agree that it is likely that capital cities will experience strong house price growth over the next two years with prices rising 20% to 30% over this property cycle—note there isn’t just one single Australian property market, so certain segments of the market will outperform over the rest, namely the more affluent suburbs in capital cities where residents have higher wage growth and savings.
Indeed consumer confidence, a recovering economy, favourable supply and demand ratio on top of super low interest/ mortgage rates will continue to underpin house prices throughout 2021.
At the most superficial level, the impact of Covid indicates that landed homes are the way forward. Data on capital gains also shows that landed houses have gained more in value compared to apartments Down Under over the past 25 years. But just buying any old landed house for fear or missing out with no regard for the bigger picture is not the way to go. In a nutshell, correct property selection will be critical to the performance of your investment.
Wherever in the world that you choose to invest in, find out how your desired investment property stacks up by using our G.O.L.D.M.I.N.E. Strategy © and S.A.F.E.T.Y. 1st © Criteria to ensure you have considered everything necessary for exponential growth. No idea what that is? Attend our free webinar to learn more. Register here: https://webinar.csiprop.com/
Check out our Mid-2021 Outlook on the UK Property Market here.
By Vivienne Pal All data is accurate and up to date at time of writing. © 2021