We recently
experienced a "once in a generation property boom” in 2020 and 2021 where the
value of almost every property in Australia increased by 20% -30%.
The first
significant boom I experienced in the 1970s was driven by:
High
inflation but just as importantly…
In the
1970s, more women entered the workforce and banks started accepting their
income for serviceability, giving the average household twice as much borrowing
capacity.
In the1990swe
had the deregulation of banks, and nonbank lenders such as Aussie Home Loans
entered the market, with less restrictive lending policies.
This
allowed people to borrow up to a 95% loan-to-value ratio and this increased
availability of credit led to a significant property boom in the late 90s.
In the early 2000s, Australia enjoyed a mining boom that created significant wage
increases, not just in Western Australia but around Australia, again giving
people the capacity to borrow significantly more money and leading to another
major property boom.
In the late 2000safter the Global Financial Crisis Australia experienced another
mining boom that drove our economic growth.
At the same
time, Australia became a preferred destination for significant foreign
investment in residential real estate, as foreign investors saw our housing
markets as relatively cheap and our economic and political environment as
stable compared to other countries.
Once again,
this structural change pushed up the value of the residential real estate as
overseas investors often outbid locals for many properties.
That brings
us to the latest substantial property boom in 2020 -21when we
once again experienced a significant structural change as interest rates
dropped to historic lows giving borrowers significantly increased borrowing
capacity and this, together with a raft of government stimulus packages, came
at a time of significant pent up demand and created that once-in-a-generation
property boom and increased the total value of residential real estate around
Australia by over $2 trillion.
But that’s
long gone and I don’t think we’ll see a significant structural shift again for quite
some time.
The next
significant structural change is likely to occur when the Baby Boomer
generation dies off and transfers around $6.2 trillion worth of wealth they
hold in their residential properties to their families.
So that
brings us back to the question of what, if anything, will drive future property
price growth.
The rising
tide that lifted all ships in the last boom has now gone, as has the period of
rising household incomes and low-interest rates that we enjoyed over the last
decade, meaning our property markets will be much more fragmented moving
forward and capital growth will be dependent on local factors including
demographics, gentrification, neighborhood and wages growth of the people in
these locations.
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Jason Gwerder
Thursday, 24 August 2023
