During 2020, most economists and commentators predicted that property values would plummet by 10%, 20% or even 30%! In May, I wrote a blog (and in The Australian newspaper here) outlining the reasons why I disagreed with these overly bearish forecasts. We now know that property prices didn’t fall by any more than 2% to 3% and have since recovered.
In 2021, I predict the property market rhetoric will switch from “values will fall” to “values are too high”! The media will start saying that property prices are too high, they’re over-valued and so on. Again, they will be wrong. Be prepared to expect and ignore this useless hyperbole.
Here are 4 reasons that we should expect a very strong market next year.
(1) The past 5 years have been below average
The property market needs to make up for the past 5 years of lacklustre growth. According to the Real Estate Institute of Australia, on average, median house prices in Melbourne and Sydney have appreciated by a measly 2.85% p.a. in the 5 years ended June 2020. That is well below the average growth rate of 7.5% p.a. over the past 40 years (Melbourne and Sydney). We know that all markets have a strong trend of mean-reversion. That is, periods of below trend growth are typically followed by periods of above trend growth.
Over the past 5 years the property market has had to navigate a number of unique and significant events. Severe tightening in credit occurred throughout 2015, 2016 and 2018. During 2018 and 2019, the market had to digest the potential impact resulting from the banning of negative gearing and higher CGT as proposed by the ALP (remember, the ALP were tipped as clear winners). As we all know, in 2020, the market had to deal with the impact of Covid.
These three major events have occurred consecutively over the past 5 years, hence the below trend growth. Investors should take comfort from the fact that property has actually performed relatively well considering the circumstances.
(2) Low interest rates inflate asset values
Low interest rate settings are put in place by governments to stimulate economic activity. Low interest rates encourage businesses and consumers to increase spending (because their interest expense falls) and investment (because money is cheap). The cost to hold assets, such as property, is reduced and as such these assets tend to rise in value. It’s a commonly acceptable economic principal.
I wrote a blog in May this year citing that in many situations, it’s cheaper to own property than rent it. Since May, rates have fallen further, especially for owner-occupiers. This phenomenon won’t last for long. Property values will rise until, once again, it’s cheaper to rent than own. This would have happened already if it wasn’t for the event of recent years (discussed above).
The government has slated some substantial changes to credit laws which could significantly increase borrowing capacities from March 2021. If this becomes reality, it will further fuel the impact of low interest rates.
(3) There’s plenty of support for the property market by banks and governments
In November, the property market benefited from a number of changes announced by state and federal governments.
The federal government extended its HomeBuilder package that was set to expire at the end of 2020. NSW announced that it will seek to replace stamp duty with an annual land tax. The Victorian government will discount stamp duty for home buyers spending up to $1 million on new and established property.
These initiatives tend to improve overall market confidence.
As we have seen throughout 2020, the banks are prepared to help borrowers that have been impacted by Covid. I anticipate that this will continue into 2021 and it will minimise forced sales. Of course, some mortgagee sales will be inevitable, but they are unlikely to be material.
(4) Covid-free and better than anticipated economic recovery
So far, the Australian economy has recovered from the impact of Covid faster than expected.
The number of borrowers on loan deferrals has reduced from a peak of circa 10% to 3.9% at the end of October. If the trend continues, and I’m sure it will, the number of loan deferrals by year end will be materially lower.
Credit card spending data released by the banks suggests that people are spending more than they were pre-Covid. I discussed this in my blog last month here.
Last week Westpac announced that consumer confidence had completely rebounded from Covid and is now at a 10-year high.
Overall, whilst I expect some industries and Australian’s will be severely impacted by this year’s events and take many years to recover, that at a macro level, Australia’s economic recovery will be much better than other developed nations. Together with its handling of Covid, this will make it an even more desirable location to immigrate to, which will fuel population growth over the next decade. Population growth is a significant contributor towards property price growth.
Of course, there could be another x-factor!
Of course, an unexpected x-factor could arise next year to upset my forecast above. We have been well conditioned over the past few years to expect the unexpected. But let’s cross our fingers for a far less eventful year next year.
Don’t bet against the property market
There are a number of fundamental factors that exist in Australia that underpin the robustness of the property market. That is not to say that the market can never crash. Of course, anything is possible. But because the property market is almost ‘too important to fail’, the likelihood of a crash is remote in my view. The government and banks have a strong incentive to maintain a healthy property market.
We can argue about whether that is right or wrong, but the fact remains. You can use it to your advantage. The choice is yours.