It is difficult to make predictions, especially about the future. An old adage, this is very true of Australia’s property market.
About this time last year, property investment did not feature high on anyone’s agenda. The WHO had just announced that the world was facing a devastating pandemic, and images dominated in the media of people being locked up in their homes in Wuhan, and of mass graves in Italy. Millions could be dead, we were warned. With international borders closing and uncertainty about job security, the pundits predicted a 10-15% year-on-year drop in the immediate future. If people could not get to work to keep their jobs, how could they expect to take on more debt and service a mortgage?
And yet, only a year later, the local property market seems to be hitting a boom. Economists at Commonwealth Bank are predicting a rise of as much as 16% over the next two years for houses and 9% for apartments. Westpac has also made similar forecasts. It is not uncommon to see auction clearance rates at over 85% on weekends.
While the surge in property prices could be explained by the most basic of economic theories – supply and demand, low interest rates and easing of lending criteria seem to be the major factors here. Currently, we have on one hand buyers in fear of missing out on the boom, and on the other, less supply as sellers, especially homeowners, fearful that if they sell out without having another home to move in to, might not be able to get back into the market. And then there is cheap money.
As the government works to stimulate the economy post-pandemic, official interest rates have fallen to 0.25% pa. The government has made it clear that they do not want to increase interest rates till there is a drop in unemployment and upward movement in business investment. It is not uncommon to see interest rates being quoted of 1.99% fixed for four years – this means a million dollars of borrowing can be funded by $20,000 of annual interest repayments. Yes, the capital needs to be paid back also over time, but the borrower is in hope that the capital growth on their property over time will mitigate that risk. The banks are also loosening the chains around lending, imposed after the Hayne Royal Commission. Over the next few months, expect to see more flow of funding from them, as their filters for lending become less stringent.
The Indian Australian community is a growing community; the typical Indian migrant is 34 and has high disposable income. Buying the first home is an important statement that they have arrived and settled in well. With the current boom in Australia’s property market, they need to plan carefully to time their entry in well. Owning a surging asset does create a sense of well-being and prosperity. It is an asset which cannot be easily sold, and while the ill liquidity can be a hindrance, it also allows for a forced accumulation of wealth. They must however be wary of challenges to the cash flow, and the level of debt that is taken on.
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