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03 Jun 2021

Property market’s performance hinges on Australia’s COVID-19 prevention

By Damon Frith, content editor for Citi The Australian property market is likely to extend its strong performance into the remainder of the year, as long as the government can maintain the effectiveness of its COVID-19 prevention measures.

Australia’s Property Market Posts Record-breaking Gains in First Half

In the first half of 2021 Australia’s property market defied expectations by posting record-breaking gains, as COVID-19 prevention measures proved more effective and the government unveiled monetary and fiscal measures to keep the economy afloat.

These included keeping the official cash rate target at a record low level of 0.10% since November, as well as a slew of schemes to support the property market such as HomeBuilder.

CoreLogic data indicates in the first quarter of 2021 Australian home values rose 5.8%, for the highest quarterly growth rate since 2003, while the combined regional dwelling market was 11.4% higher in value.

The end of April marked the first time the total value of Australian housing breached the $8 trillion mark, making residential property approximately four times the size of national GDP, as well as $1 trillion more than the combined value of the ASX, superannuation and the stock of commercial real estate.

Amidst the huge uncertainty of the COVID-19 pandemic, a range of factors will determine the performance of the Australian property market in the second half.

Chief amongst them will be the success of efforts to contain COVID-19, changes to migration levels, and the policy response of the government to shifting economic conditions.

Successful Containment of COVID-19 Will Buoy Australian Economy

The decisive factor behind whether Australia’s property market will continue to perform strongly in the second half will be the government’s ability to continue to keep COVID-19 at bay.

Australia proved exceptionally successful in its COVID-19 response, setting the conditions for an economic recovery well ahead of other nations still grappling with the disease.

While the Treasury forecast in its October Federal budget that it would take until the 2023-2024 financial year for the unemployment rate to return to around 5.5%, a mere five months subsequently the reading fell to 5.6%, just 0.5 percentage points above levels prior to COVID-19.

Should Australia continue to keep COVID-19 at bay, the Reserve Bank of Australia (RBA) forecasts that GDP and employment will return to pre-pandemic levels over the course of the current year, approximately 6 - 12 months earlier than previously predicted.

The RBA forecasts that under such a scenario GDP will grow by around 3.5% over both 2021 and 2022, as compared to a contraction of approximately 2% over the year to December 2020.

This strong economic performance will serve as an ongoing boost to the Australian property market and help to drive dwelling prices higher, but will be contingent upon prevention of a major outbreak of COVID-19 domestically.

Migration Plunge Could Dent Property Market Performance

Australia may have proven successful at containing COVID-19, but the pandemic continues to rage beyond Australia’s shores, particularly in emerging economies in Latin America and South Asia.

This has led to the imposition of strict travel restrictions and border controls internationally, which will drag down Australia’s inbound migration level.

The May Federal budget forecasts net overseas migration of negative 72,000 in the financial year ending 2021, with the negative population trend continuing into 2021 - 2022.

This will have a profound impact upon the Australian economy and the property market in particular, given that it has long been heavily dependent upon newcomers to the country to drive market demand.

As Economy Recovers Shifts in Macro-policy May Warrant Concern

In addition to a dent in demand resulting from reduced migration, adjustments to monetary or fiscal policy in response to the Australian economy’s robust recovery could also serve to slow the property market.

RBA governor Philip Lowe said in a March speech that given current rates of inflation and employment levels, he does not expect the target rate to undergo upward adjustment until at least 2024.

The surprise early recovery of the Australian economy from COVID-19 has nonetheless created room for the RBA to shift its tack on monetary policy in advance, and the federal and state governments to dial back stimulus measures.

The boom itself has created major problems with the affordability of Australian housing, causing concern amongst policymakers and producing the impetus to stymie growth in property prices.

Lowe said in March that “high and rising housing prices raise concerns for money people,” and highlighted the possibility of using macro-prudential policies to address the issue, as well as reducing favourable tax treatment of housing relative to other assets.

Should Australia refrain from making any major adjustments to policy settings however, as well as continue to keep the COVID-19 pandemic at bay, all signs point to the strong performance of the property market in the second half, albeit at a slower pace compared to the record-breaking growth seen in the first half.

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