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4 factors impacting home prices - besides interest rates

Eliza Bavin
·4-min read
House model with australian dollar banknotes on table
(Source: Getty)

It’s never been so expensive to buy a home. And with super low interest rates - which look set to stay for some time - it’s no surprise property prices just keep rising.

Average dwelling prices in capital cities rose 2.8 per cent in March, the largest gain in more than 30 years.

And it’s not just in the capital cities either - regional markets are up 11.4 per cent from last year.

But interest rates aren’t the only thing holding up property prices.

AMP Capital chief economist Shane Oliver said that while super low interest rates have been the main player in keeping the property sector booming, there are other factors to keep an eye on.

1. Winding back of Government support packages

The government rolled out a number of stimulus measures to keep the economy moving when the full effects of the COVID-19 lockdown were realised.

And while the stimulus packages kept people employed, the removal of these measures is something to watch.

JobKeeper, and less prominent HomeBuilder, were both phased out at the end of March and the First Home Loan Deposit scheme was tapped out.

Most Australians probably appreciate the extent to which JobKeeper has kept the country afloat over the past year, and if its removal continues to proceed without too much drama it will have been something of a victim of its own success,” Oliver said.

But Oliver points out that in the absence of a significant new lockdown, any impact from the winding back of these measures would be marginal.

“Actual net job losses from the ending of JobKeeper are likely to be low and the proportion of loans at risk is minimal, as demonstrated by the fact that the value of home mortgages still relying on payment holidays had declined from 11 per cent in May 2020 to less than 1 per cent by the end of February,” he said.

2. Australia’s economic bounceback

It’s no secret Australia’s economy has fared well compared to some others, and with employment figures returning to pre-COVID levels and GDP growth of 3.1% in the December quarter that looks set to continue.

“Continued strong economic growth has immediate implications for incomes and house prices, and risks providing a solid platform for continued exuberance in housing,” Oliver said.

3. Lending rules

House prices in the past have been significantly affected by changes made by APRA to regulations around lending standards for residential property, Oliver explained.

This is something that may act to restrict house prices and actually dampen the boom.

“The relaxation of these regulations in the period prior to the pandemic is arguably contributing to the availability of capital in the current boom,” he said.

“And since an interest rate rise is out of the question for the moment, it’s likely that the regulators will reach yet again for macro-prudential controls to slow housing lending and contain risk in the sector,” he said.

But re-introduction of lending restrictions won’t necessarily cause an immediate effect to home prices, Oliver explains, because history indicates surging house prices leads to a deterioration in lending standards and increasing risks to financial stability.

“All of this suggests that APRA could start tapping the lending standards brake soon, firstly by increasing interest rate buffers but potentially also by reintroducing limits on high loan to valuation lending and restricting loans to customers with lower serviceability,” Oliver said.

4. Shift in living patterns

Given people are spending more time since the pandemic began, we have seen a shift in Australians focussing more on home-improvement as opposed to a change in dwelling.

However, this is not expected to continue as borders open back up and travel resumes.

“Lower rates of immigration (which disproportionately affects urban demand) and the secular trend towards working from home are two such factors, and both have contributed towards the outperformance of regional dwelling prices,” Oliver said.

“They are also helping to drive a growing disconnect between house and unit prices.”

Oliver said while the immigration deficit will slowly return to normal, over the longer-term he predicts the move towards working from home will take pressure off prices.

“The trend to decentralised working will be more resilient, and governments may even consider encouraging working from home as a way to take pressure off capital city prices over the longer term,” Oliver said.

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