While the economic recovery continues, Australia begins 2021 with some tailwinds…
The arrival of COVID-19 in early 2020 saw a multitude of experts erroneously predict an impending Australian housing market crash. Defying all speculation, property has once again proved its resilience by finishing the year with a 3.0% increase in dwelling values.
Source: ABS, Labour Force, Dec 2020
During the lockdowns of mid-2020 you would be forgiven for thinking that a strong recovery of this kind could take months, if not years, to produce the results that we are seeing. However, with a few underlying factors in favour of the property market; including historically low interest rates, and a buoyant job market – Australian property is set to defy further expectations as we continue into 2021.
With employment numbers nearly back to the pre-COVID peak, consumer sentiment remains positive despite the imminent end of government stimulus such as JobKeeper. Such optimism is being fuelled by the better-than-expected results surrounding the swiftly rebounding employment rate.
In February 2020 we reached peak employment with around 13,003,900 employed. This was followed by the trough three months later in May 2020 where employment fell by 877,600 persons.
Since that low-point in May, the job numbers have been steadily improving, with the latest data from December 2020 showing the number had increased to 12,910,800 employed.
Both the unemployment rate and the underemployment rate are showing positive trends. In the month of December 2020 the unemployment rate had dropped -0.2% to 6.6% (which is 1.5 points higher than a year ago in December 2019). Similarly, the underemployment rate dropped -0.8% to 8.5%, only 0.3 points higher than a year ago.
Source: ABS, National Accounts, September 2020
Other key economic indicators are also showing positive signs of recovery. In the latest economic data available from the Australian Bureau of Statistics for September 2020, Australia’s economy rose 3.3% in the September quarter which had followed a record decline of 7.0% in the June quarter of 2020.
One of the interesting results of the decline in economic activity was the sharp increase in household savings which peaked at 22.1% in that quarter.
As nice as it is to have a growing balance in your savings account, it is spending (and not saving) that is going to help the economy. Such a substantial portion of the population holding savings in their bank accounts means that we could see an influx of buyers entering the property market this year. Adding to this is the discussions around stamp duty reform which see further incentive for many to consider purchasing property.
Source: ABS, National Accounts, September 2020
Current vacancy rates around the country indicate that we are now in the midst of a rental crisis as well as a shortage of the right type of housing in most parts of the country.
A healthy rental housing market has a vacancy rate of between 2% and 3%. Even before COVID arrived, most of Australia was a tight rental market (unless you were looking in locations with a glut of high-rise apartment buildings).
The peak national vacancy rate in 2020 was in April, where the rate increased 0.1% to 2.6%, and since the peak in April 2020, the national vacancy rate has fallen -0.3% to 2.2%. However, the true situation becomes more clear when we start to look at the vacancy rates at a local level, at individual cities and regions. You can read our full report here on why the rental crisis is providing property investors with enormous opportunity to capitalise and grow their wealth during this time.
The chart below shows the change in vacancy rates from December 2019 to December 2020.
A surge in house prices is coming…
One of the leading indicators of price movements is the value of new lending to home buyers. In the latest data on loan approvals, there was a surge in new loan approvals to buyers (i.e. excluding refinancing) of 46.7% from the trough-level in May 2020 until November. Lending to owner-occupiers grew by a massive 49.8% trough-to-peak, while investor lending grew by 37.3% over this period.
Source: ABS, Lending indicators, November 2020
This significant increase in buying will put upwards pressure on house prices, particularly in regions with an undersupply of housing. However, if you are looking for price growth, it is important to understand the situation on the supply-side, and to know which regions are going to be undersupplied or oversupplied.
The latest data on housing construction show a steep increase in building approvals for private section homes. From a low-point in June 2020, there was a surge in building approvals of 40% to November. This followed a Federal stimulus measure called ‘Homebuilder’ which offered $25,000 to home buyers (owner occupiers), and the scheme was initially set to run from June until the end of 2020.
Source: ABS, Building Approvals, November 2020
It’s clear from the data that the stimulus measure had the intended effect, which was to stimulate the construction industry, and the grant (now $15,000) has been extended until 31 March 2021.
This new supply raises questions about where the new supply will be going, and the type of supply being built.
Looking at the national dwelling type mix for new building approvals over the last 3 years, we can see the trend for detached houses is increasing, the trend for units is decreasing, and townhouses have remained stable.
Source: ABS, building approvals, by type
In fact, the building approvals for houses has surged towards the end of 2020, with building approvals for houses making up 69% of the dwelling type mix.
When analysing the breakdown of new building approvals by dwelling type across local markets, it would appear that some in the construction industry are not wholly in sync with the demand of the market in terms of the right type of dwelling. It’s clear from studying the vacancy rate data that not all locations and dwelling types are in demand, and there are hotspots around the country where there is an oversupply of dwellings in high-density residential zones with a glut of high-rise apartment buildings.
For example, a look at the building approvals for NSW over recent months show a small increase in approvals for houses, and a relatively large increase in approvals for units.
Source: ABS, Building approvals by type
Since the surge in national building approvals from June 2020, 13,942 new houses were approved, 4,025 townhouses were approved, and 6,658 apartment units approved.
So while the building approval numbers look high, the housing mix is not quite in line with the market, and therefore we can expect high levels of competition (and upwards pressure on prices) of certain dwelling types.
Price growth in regional areas
CoreLogic’s market data for 2020 showed that the combined regional markets outperformed the combined capital city markets by the end of the year.
CoreLogic reports [source] that the best performing regional markets were those that were still relatively close to the major capital cities, such as the Gold Coast, Newcastle, Wollongong, Geelong and Ballarat, where residents can the best of both worlds with an improvement in lifestyle from affordable housing, with the ability to commute to the city if needed.
This trend will likely continue throughout 2021, as international travel restrictions continue to impact the flow of overseas migrants, tourists and international students into the capital cities.
Likewise, for some middle and outer-ring suburbs of the capital cities (which are still the engine rooms for the economy) have a similar low-density lifestyle attraction to some regional markets, and where the vacancy rates have also fallen to critical levels throughout 2020, the growth forecast for these suburbs is also looking very strong over the short to medium term.
With an upwards trajectory on house prices, and better cash flow from increasing rents, it pays to partner with data driven experts who are able to accurately pinpoint investment hotspots.
For those who are not yet positioned to benefit from these trends, there is still a small window of time to take advantage of the opportunity that this presents. The Reserve Bank of Australia (RBA), as well as multiple major banks, are forecasting further price growth over
the next three years – driven by economic recovery measures and low interest rates.
In particular, Westpac forecast a ‘surge’ in house prices of 15% over two years from June 2021 nationally, with cities like Brisbane set to outperform the national average. And with interest rates likely to remain at low levels for an extended period, the RBA are predicting
house values could see a jump of over 30% in just three years.
Freedom Property Investors approach property investment as a science, relying on a strict and precise methodology for selecting future high growth property markets across Australia. We aim to provide our members with investment properties that will outperform market averages for both capital growth and rental yield.