Six ways COVID-19 has shaped the housing market

There has been a monumental change in the Australian housing market and CoreLogic’s head of residential research, Eliza Owen, explains how the global pandemic has catalysed remarkable shifts in the market.

From the temporary shutdown of cities, to an unprecedented monetary policy strategy, a new-found popularity of regional and low-density housing preferences and the introduction of various government home buying incentives, the COVID-period has had distinct impacts on the composition of buyers and the dynamics of the housing market.

Ms Owen explores six of the major impacts on the Australian housing market two years on.

1. Australian home values rose 25 per cent, to record highs

Despite an initial dip, housing values rose 24.6 per cent between the end of March 2020 and February 2022.
National home values declined -2.1 per cent between April 2020 and September 2020, before soaring amid low interest rates, high household savings, government grants and a sharp reduction in the supply of housing.

2. First homebuyer activity spiked

First homebuyers were a sizable part of housing demand at the start of the pandemic.
This cohort took advantage of more affordable housing options following the earlier downturn, along with record low mortgage rates and government incentives.

From June 2020, first home buyer activity surged amid the introduction of the HomeBuilder scheme, used alongside the First Home Loan Deposit Scheme, as well as other state-based grants and stamp duty concessions for first homebuyers. As of January 2022, loans to first homebuyers numbered 10,964, above the decade average of 8,682.

3. Rents rose 11.8 per cent to record highs, while gross yields fell to record lows

The CoreLogic Rent Value Index, which tracks changes in rental valuations over time, has also surged to new record highs. While rents saw a mild decline of -0.8 per cent between March and August 2020, there was a swift recovery in these values, followed by a surge through 2021.
Over the course of 2021, annual rent value growth was at its highest levels since 2008. Across Australia, median advertised rents since March 2020 have increased $30 per week to $470 per week.

4. Housing debt levels hit record highs

Rapid increases in housing and rent values in the past two years was largely the result of a sizable reduction in the official cash rate.
With the RBA setting the official cash rate target at 0.1 per cent since November 2020, lower debt costs enabled borrowers to access more credit.

As of January, total outstanding housing credit sat at a record high of over $2 trillion, according to the RBA, while the ratio of housing debt to household income was at a record high 140.5 per cent through Q3 2021.

While total outstanding credit reached over $2 trillion in January, ABS data shows monthly new finance borrowed for the purchase of property continued to hit fresh record highs through January 2022, at $33.7 billion.

High levels of housing debt, particularly where it has grown faster than incomes, creates a vulnerability in the Australian economy.

5. The premium of house prices compared to units hit record highs

Both the composition of the buyer pool and the impacts of COVID may have contributed to a record gap between house and unit values.
Investors, who may have a preference for units, have been a relatively small part of demand through the upswing.

Additionally, detached houses may have been in higher demand as Australians spent more time at home through the pandemic.

The result is a record high gap between house and unit values, the median house value across Australia was at a record high 29.8% above the median Australian unit value, with a dollar value premium of around $182,000.

6. The rise of the regions

Migration trends over 2020 and 2021 revealed an uptick in the volume of people leaving cities for regions outside of lockdown periods, and a decline in people leaving regions for cities.

The result has been higher than normal housing demand against unusually low levels of listings across regional Australia, in both the sales and rental market.

Value gains across regional Australian dwelling values has been almost 40 per cent since March 2020, while capital city home values have increased around 21 per cent.

In conclusion, Ms Owen predicts that there are more headwinds than tailwinds now stacked against continued growth in the property market, with the potential for sooner-than expected cash rate increases, affordability constraints, and weakening consumer sentiment slowing demand.