How is the inflation and housing market scenario in Australia?

The Reserve Bank of Australia (RBA) has left its cash rate at record lows of 0.10% since November 2020, in hope of inflationary pressures of reaching their target range of 2 to 3%. The cash rate is the interest rate on unsecured overnight loans between banks. Even with output levels back at pre-pandemic levels, Australia's central bank chooses an easy money policy to be the way for the near future. 

According to RBA Governor Lowe, cash rates will stay put until inflation, and wage growth does not reach 2% and 3%, respectively. Amidst such expansionary policies, prices in the housing sector are shooting over the roof.  As per the recent ABS release the residential property price index (weighted average for eight capital states) registered a 7.5% annual growth and 5.4% quarterly growth- the most substantial quarterly growth since 2009. The mean price of residential dwellings in Australia has seen a growth of approximately AU$40,000 Q/Q.  It is a first timer that the total value of residential dwellings has crossed AU$8 trillion.

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What triggered the demand surge in the housing market in Australia?

According to Australian Bureau of Statistics’ (ABS) quarterly estimates of key economic flows in Australia released in June, there was a growth of 6.4% in dwelling investment for the third quarter in a row. Quarterly growth increased to 4.4% in Construction Sector’s Gross Value Added while Rental, Hiring and Real Estate Services rose 5.3%.

The Australian housing sector is booming, thanks to low interest rates and government policies easing home buying. Investors want to seize the opportunity to acquire a new home. Extended repayment period, Family home guarantee with benefits for single parents and increased number of people eligible for first home loan deposit scheme are few policies inviting more and more demand for housing in the Australian market.

Lenders are now offering a longer period for repayment. Borrowers can now pay back in 30 years, this is a relief as it will bring down the size of payments for the borrowers. Earlier, the standard mortgage was 25 years.

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Last month’s budget included that 10,000 single parents would be left with as low as 2% deposits because they will get a government guarantee of up to 18% of the property value over a four-year period- this development was under the Family Home Guarantee.

The First Home Loan deposit scheme, which requires only a 5% deposit from first time home buyers, is also a stimulating policy for first-time buyers. The number of people eligible for this scheme has also been increased. Such a scheme could also attract even people with no investment plans in real estate.

Also read: Tailwinds for the Australian Economy

All these factors supplemented by consumer confidence rebound with the opening up of the economy has created a strong demand for housing. This has caused a record rise in housing prices.

Will inflationary pressures make prospective home buyers backpedal?

In the first quarter of 2021- the surge is led by Sydney and Melbourne. The growth in housing prices is 6.4%, while it was 2.7% for attached dwelling prices. Y-o-Y residential prices rise was 7.5%, with the largest annual rise recorded by Canberra followed by Hobart and Perth.

Core Logics released their first Million-dollar market release in mid-June this year. According to the report, 218 markets have been identified as reaching the million-dollar mark.  Of the 218, house markets were 198. While the boom means accumulation of wealth for existing homeowners, for the first time buyers, whose demand is more price elastic, the price surge would be a reason to rethink their home buying decision.

Australia is recovering well, with unemployment levels falling close to pre-pandemic levels. Unemployment fell by 5.1% in May, indicating a strong recovery following the post-pandemic downturns. At 7.4%, underemployment is at its lowest level since 2014. Yet, the RBA does not intend to employ a tight monetary policy.

In a speech, Luci Ellis, the RBA assistant governor for economics, reiterated the status quo on "highly supporting monetary conditions" and that "the pandemic is not over." She said that full employment achievement was a national priority because that would speed up attaining wage growth and inflation targets. 4% rate of unemployment is the level at which RBA expects to attain its targets.

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Currently in place are supportive policies of the government to boost the economy’s aggregate demand. However, the stimulus from government initiatives to promote home buying may be offset by the inflationary pressures in the housing market. ABS finance data showing a decline in loans for property purchase by first time buyers, and this trend has persisted for three months.

Later, when there is a further move to stop the assistance programs or taper purchases, and the interest rate begins to rise, the deflationary policies will push up the borrowing cost that may become a challenge for debt repayment.