Record low interest rates, home loan vacations and working from home may have kept the Australian housing market from crashing during the COVID-19 pandemic.
A new analysis from real estate firm CoreLogic has theorized why property values did not fall during the worst of the pandemic, particularly when the fortunes of small businesses and employment were so dire.
Just before the nationwide lockouts, many expected the worst: the general consensus was that Australian property values would drop 10 to 30 percent.
But the reality was very different.
Overall, between March and October this year, Australian home values fell just 1.7 percent. In October they even increased, registering a marginal but technically significant increase of 0.4 percent.
So why didn’t the Australian market crash?
According to CoreLogic head of research Eliza Owen, the low cost of debt was a huge umbrella for the market.
“The cost of borrowing money is probably one of the most important factors influencing property values. During 2020, the RBA lowered the official cash rate target (which influences loan rates) by 65 basis points at 0.1%, “writes Owen. .
“In an attempt to stimulate economic activity, the reduced cash rate has lowered bank financing costs, leading to historically low mortgage rates.
“This relationship has historically held, and RBA research previously suggested that a 100 basis point reduction in the cash rate can lead to an 8 percent increase in property values over the next two years.”
When unemployment soared, those who couldn’t pay their mortgages received a reprieve: all the big banks offered six-month pay “vacations” to make up for job losses and defaults.
“Those who did not want to sell amid economic uncertainty due to the inability to pay their mortgage did not have to,” writes Ms. Owen.
“This may have contributed to very low inventory levels throughout 2020, which were only reduced further amidst stage 2 restrictions starting in March. The low level of stocks in the market probably helped to isolate the home values during this time. “
Finally, it is theorized that many of the Australians who were unlucky enough to lose their jobs probably did not invest in the housing market.
“Those who work in food, shelter, arts and recreation have seen a devastating job loss from the pandemic,” Ms Owen writes.
“However, those who work in this industry are less likely to have mortgage debt.
“The decline in employment in these sectors probably contributed to serious losses in rental income, but the investor paying the debt can retain the asset while it is temporarily vacant.”